<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE NUMBER 0-28328
UROCOR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2117882
(State of incorporation) (IRS Employer Identification No.)
800 RESEARCH PARKWAY, OKLAHOMA CITY, OK 73104
(Address of principal executive offices) (zip code)
</TABLE>
(405) 290-4000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 / /
The number of shares of issuer's Common Stock, $.01 par value, outstanding
on April 30, 1998 was 10,360,682 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
UROCOR, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of March 31, 1998 and December 31, 1997..................................... 3
Statements of Operations for the three months ended March 31, 1998 and 1997................... 4
Statements of Cash Flows for the three months ended March 31, 1998 and 1997................... 5
Notes to Unaudited Interim Financial Statements--March 31, 1998............................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 7-9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS................................... 9
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................. 10
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................................... 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 10
ITEM 5. OTHER INFORMATION
Cautionary Statements......................................................................... 11-15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 15
Signatures................................................................................................ 16
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UROCOR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
MARCH 31, -------------
1998
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 8,528,875 $ 6,896,033
Short-term marketable investments................................................ 11,188,744 16,697,067
Accounts receivable, net of allowance for doubtful accounts of $2,762,869 in 1998
and $1,2,619,485 in 1997....................................................... 16,461,888 13,541,416
Prepaid expenses................................................................. 906,779 988,659
Laboratory supplies, at average cost............................................. 477,051 497,639
Deferred tax asset--current...................................................... 1,451,781 1,470,781
Other current assets............................................................. 741,130 776,699
------------- -------------
Total current assets........................................................... 39,756,248 40,868,294
------------- -------------
LONG-TERM MARKETABLE INVESTMENTS................................................... 3,049,481 2,012,656
PROPERTY AND EQUIPMENT, net........................................................ 9,761,848 9,010,582
NON-CURRENT DEFERRED TAX, net...................................................... 327,684 358,684
INTANGIBLE AND OTHER ASSETS, net................................................... 2,373,278 2,201,903
------------- -------------
Total assets................................................................... $ 55,268,539 $ 54,452,119
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 2,860,108 $ 2,263,645
Accrued compensation............................................................. 460,289 665,817
Current installments of obligations under capital leases......................... 368,798 441,435
Other accrued liabilities........................................................ 122,359 108,421
------------- -------------
Total current liabilities...................................................... 3,811,554 3,479,318
OBLIGATIONS UNDER CAPITAL LEASES, net of current
installments..................................................................... 145,166 217,697
------------- -------------
Total liabilities.............................................................. 3,956,720 3,697,015
------------- -------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value--authorized 6,000,000 shares at March
31, 1998 and at December 31, 1997; issued in series; no shares outstanding at
March 31, 1998 and at December 31, 1997........................................ -- --
Common stock, $.01 par value, authorized 20,000,000 shares at March 31, 1998 and
at December 31, 1997; 10,358,016 shares issued and outstanding at March 31,
1998 and 10,345,616 shares issued and outstanding at December 31, 1997......... 103,580 103,456
Additional paid-in capital....................................................... 58,435,824 58,390,646
Accumulated deficit.............................................................. (7,227,585) (7,738,998)
------------- -------------
Total stockholders' equity..................................................... 51,311,819 50,755,104
------------- -------------
Total liabilities and stockholders' equity..................................... $ 55,268,539 $ 54,452,119
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
UROCOR, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
REVENUE............................................................................ $ 10,613,795 $ 8,078,565
OPERATING EXPENSES:
Direct cost of services and products............................................. 4,047,992 2,981,103
Selling, general and administrative expenses..................................... 5,569,106 3,689,364
Research and development......................................................... 508,374 610,050
------------- -------------
Total operating expenses....................................................... 10,125,472 7,280,517
------------- -------------
Income from operations........................................................... 488,323 798,048
OTHER INCOME (EXPENSE):
Interest income.................................................................. 361,330 453,616
Interest expense................................................................. (25,258) (50,580)
------------- -------------
Total other income............................................................. 336,072 403,036
------------- -------------
Income before income taxes....................................................... 824,395 1,201,084
Income taxes..................................................................... 313,000 --
------------- -------------
NET INCOME......................................................................... $ 511,395 $ 1,201,084
------------- -------------
------------- -------------
NET INCOME PER SHARE:
Basic:
Net Income Per Common Share...................................................... $ .05 $ .12
------------- -------------
------------- -------------
Weighted Average Common and Common Equivalent Shares Outstanding................. 10,350,245 10,140,523
------------- -------------
------------- -------------
Diluted:
Net Income Per Common Share--Assuming Dilution................................... $ .05 $ .11
------------- -------------
------------- -------------
Weighted Average Common and Common Equivalent Shares Outstanding--Assuming
Dilution....................................................................... 11,035,779 11,131,532
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
UROCOR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 511,395 $ 1,201,084
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization.................................................. 601,592 314,039
Deferred income tax............................................................ 50,000 --
Stock option compensation expense.............................................. 31,527 32,300
(Gain) Loss on disposition of equipment........................................ (8,060) 519
Changes in assets and liabilities:
Increase in accounts receivable.............................................. (2,920,472) (2,240,378)
(Increase) decrease in prepaid expense....................................... 81,880 (152,983)
(Increase) decrease in laboratory supplies................................... 20,588 (19,787)
(Increase) decrease in other current assets.................................. 35,569 (100,806)
Increase (decrease) in accounts payable...................................... 596,463 (455,881)
Decrease in accrued compensation............................................. (205,528) (796,311)
Increase in accrued liabilities.............................................. 13,938 35,238
------------- -------------
Net cash used in operating activities...................................... (1,191,108) (2,182,966)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term marketable investments, net............................. 5,508,649 5,077,643
Maturities (purchases) of long-term marketable investments, net.................. (1,036,825) 2,642
Capital expenditures............................................................. (1,331,616) (1,223,162)
Intangible and other assets...................................................... (184,864) (109,187)
------------- -------------
Net cash provided by investing activities.................................... 2,955,344 3,747,936
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.......................................... 13,775 48,529
Principal payments under capital lease obligations and other indebtedness........ (145,169) (168,512)
------------- -------------
Net cash used in financing activities........................................ (131,394) (119,983)
------------- -------------
Net increase in cash and cash equivalents.......................................... 1,632,842 1,444,987
CASH AND CASH EQUIVALENTS, beginning of year....................................... 6,896,033 15,796,070
------------- -------------
CASH AND CASH EQUIVALENTS, end of period........................................... $ 8,528,875 $ 17,241,057
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................................... $ 16,132 $ 45,628
Cash paid for income taxes..................................................... -- 15,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
UROCOR, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
NOTE 1--BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation have been
included. These interim financial statements should be read in conjunction with
the financial statements and notes included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 30, 1998.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1998.
NOTE 2--IMPACT OF ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY:
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that costs of start-up activities, as defined by
SOP 98-5, be expensed as incurred in financial statements for fiscal years
beginning after December 15, 1998. The Company has historically capitalized
certain costs associated with start-up activities for new products, processes or
operations and amortized the costs over a relatively short period of time
(usually 12 to 24 months). The Company will adopt SOP 98-5 in January 1999. The
Company currently has approximately $660,000 in start-up costs included on the
balance sheet as Prepaid Expenses, Property and Equipment, net and Intangible
and Other Assets, net, principally related to the start-up of Urology Support
Services. The Company is currently amortizing these balances through charges to
operations. Given the current rate of amortization, the impact of this change in
accounting principle in January 1999 will be approximately $380,000 as a pre-tax
charge for remaining balances. Circumstances may arise that result in
acceleration of amortization on certain start-up costs that would result in a
lesser charge in January 1999.
NOTE 3--INVESTMENTS:
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 considered available-for-sale as of March 31, 1998.
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 March 31, 1998, there was not a material net unrealized gain or
loss on these investments.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of operations and financial condition of the
Company should be read in conjunction with the Financial Statements and Notes
thereto included elsewhere in this Quarterly Report on Form 10-Q. Special Note:
Certain statements set forth below constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. See "Special
Note Regarding Forward-Looking Statements" and "Cautionary Statements" included
elsewhere in this Report.
OVERVIEW
UroCor provides a broad range of diagnostic services for the clinical
management of certain urological cancers and diseases. The Company complements
its diagnostic services by marketing and co-promoting therapeutic products for
certain of these diseases. The Company is also developing and offering related
information services intended to enhance and expand services to its clients. The
Company has established integrated capabilities 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 three months ended March 31, 1998, approximately
44%, 43%, 9% and 4% of the Company's revenue was attributable to Medicare,
private insurance and managed care, individual patients, and physicians and
hospitals, respectively.
In the fourth quarter of 1997, the Company acquired co-promotion rights to
two therapeutic products and began marketing these products to urologists. The
Company also has distribution rights for another therapeutic product currently
under review by the United States Food and Drug Administration ("FDA").
RESULTS OF OPERATIONS
REVENUE. Revenue increased 31.4%, from approximately $8.1 million in the
three months ended March 31, 1997 to approximately $10.6 million in the three
months ended March 31, 1998. These increases resulted from an increase in case
volume of 21.2% for the three month period, due primarily to expansion of the
Company's client base and increased utilization of the Company's diagnostic
products and services by existing clients. Revenue also increased as a result of
therapeutics product co-promotion revenue.
DIRECT COST OF SERVICES AND PRODUCTS. Direct cost of services and products
increased 35.8%, from approximately $3.0 million in the three months ended March
31, 1997 to approximately $4.0 million in the three months ended March 31, 1998.
This increase was due principally to higher personnel costs and supply and
distribution costs, resulting primarily from increased case volume, as well as
costs related to the initiation of Urology Support Services ("USS") in the first
quarter of 1998. As a percentage of revenue, direct expenses increased to 38.1%
(43.4% of revenue excluding therapeutics co-promotion revenue) for the three
months ended March 31, 1998 from 36.9% for the three months ended March 31,
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 51.0%, from approximately $3.7 million in the
three months ended March 31, 1997 to approximately $5.6 million in the three
months ended March 31, 1998. This increase was due principally to expansion of
marketing and sales staff related, in large part, to the therapeutics
co-promotion, increased management information services personnel and equipment
costs related to database activities and strategic initiatives to link the
company with key clients and the provision for doubtful accounts at normal
levels on higher revenues. As a percentage of revenue, selling, general and
administrative expenses increased to 52.5% for the three months ended March 31,
1998 from 45.7% for the three months ended March 31, 1997.
7
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs decreased
16.7%, from approximately $610,000 in the three months ended March 31, 1997 to
approximately $508,000 in the three months ended March 31, 1998. This decrease
was due to completion of certain external research agreements and lower
personnel costs due to a decline in personnel. As a percentage of revenue,
research and development expenses decreased to 4.8% for the three months ended
March 31, 1998 from 7.6% for the three months ended March 31, 1997.
OTHER INCOME (EXPENSE). Interest income decreased in the three-month period
ended March 31, 1998 compared to the same period of 1997, due principally to a
decrease in cash, cash equivalents and investments, resulting from capital
expenditures and an increase in accounts receivable. Interest expense decreased
in the three month period ended March 31, 1998 compared to the same period of
1997, primarily because of a decrease in obligations under capital leases.
INCOME TAXES. The tax provision for the three months ended March 31, 1998
of approximately $313,000 reflects federal, state and local income tax expense
at a 38% effective rate. No tax provision was recognized for the three month
period ended March 31, 1997 as a result of utilization of net operating loss
carryforwards. Using an effective tax rate of 38%, the recognition of tax
benefits reduced the tax provision for the first quarter of 1997 approximately
$456,000 or $.04 per share. As of March 31, 1997, a valuation allowance against
future benefits of net deferred tax assets was recorded due to uncertainty
regarding the realizability of such assets through sustained profitable
operations. As realizability of this asset became more certain through a
demonstrated positive earning history during 1997, the Company reevaluated the
appropriateness of recognizing these future benefits and recorded a deferred tax
asset in the fourth quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash and cash equivalents of
approximately $8.5 million, short-term marketable investments of approximately
$11.2 million and long-term marketable investments of approximately $3.0
million. Such marketable investments consisted principally of high-grade fixed
income securities, with a maturity of less than two years. As of March 31, 1998,
cash, cash equivalents and marketable investments totaled approximately $22.8
million and the Company's working capital was approximately $35.9 million.
Accounts receivable, net of allowance for doubtful accounts, totaled
approximately $16.5 million at March 31, 1998, an increase of approximately $2.9
million from December 31, 1997 or 22%. At March 31, 1998, the Company's average
number of days sales in receivables was approximately 149 compared to 142 at
December 31, 1997. The increase in accounts receivable during the three months
ended March 31, 1998 was due primarily to payor delays as a result of systems
changes enacted by the Company's electronic data interchange vendor as well as
additional documentation requirements imposed by Medicare and other third party
payors which further complicate the billing process. The Company is working with
the vendor, payors and its physician clients to resolve systems, documentation
and related processing issues. In an effort to reduce its average number of days
sales in receivables, the Company has implemented staffing, systems and process
changes and is undertaking additional initiatives intended to improve its claims
and collections efficiencies. The increase in accounts receivable is also
partially attributable to initial revenue from therapeutics co-promotion and USS
activities.
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.
Operating activities used net cash of approximately $1.2 million for the
three months ended March 31, 1998 compared to approximately $2.2 million for the
three months ended March 31, 1997. The net cash used in operating activities was
primarily the result of an approximate $2.9 million increase in accounts
8
<PAGE>
receivable offset in part by net income of approximately $511,000, depreciation
and amortization of approximately $602,000 and an approximate $596,000 increase
in accounts payable.
Net cash provided by investing activities was approximately $3.0 million for
the three months ended March 31, 1998 and consisted primarily of maturities of
short-term marketable investments of approximately $5.5 million, offset by
capital expenditures of approximately $1.3 million, purchases of long-term
marketable investments of approximately $1.0 million and an increase in
intangibles and other assets of approximately $185,000. Net cash used in
financing activities was approximately $131,000 for the first three months of
1998, consisting primarily of principal payments under capital leases and other
indebtedness of approximately $145,000.
The Company's capital expenditures of approximately $1.3 million for the
three months ended March 31, 1998, were primarily for computer hardware and
software, furniture and fixtures and software development for the Company's
information services. Of the total amount, approximately $131,000 was related to
internal software development costs for information services. While future
capital expenditures will depend upon a number of factors, the level of
expenditures is expected to be higher than the historical level of such
expenditures as the Company expands to deliver therapeutics and information
services and continues to enhance current diagnostic services and operational
capabilities. 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 FDA. The total cost
of the distribution rights is $3.0 million, which is payable 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 the product is approved by the FDA for marketing in the United
States. If the Company makes this payment in 1998, it intends to make any such
payment from existing cash and investment balances.
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.
The Company believes that it has prepared its computer systems and related
applications to accommodate date-sensitive information relating to the Year
2000. The Company expects that any additional costs related to ensuring such
systems to be Year 2000 compliant will not be material to the financial
condition or results of operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS:
The effective date of the registration statement for the Company's initial
public offering of Common Stock and for which this use of proceeds information
is being disclosed was May 16, 1996 and the Commission file number assigned to
the registration statement was 333-3182.
From the effective date of the registration statement through March 31,
1998, the following table identifies the purposes and amounts of the net
proceeds paid directly or indirectly to others:
<TABLE>
<S> <C>
Construction of plant, building and facilities......................... $ --
Purchase and installation of machinery and equipment................... 4,210,655
Purchases of real estate............................................... --
Acquisition of other business(es)...................................... --
Repayment of indebtedness.............................................. 2,006,607
Working Capital........................................................ 3,641,287
Temporary Investments:
Short-term Commercial Paper.......................................... 11,188,744
Long-term Corporate and Treasury Notes............................... 3,049,481
Cash Equivalents..................................................... 698,534
Other Purposes:
Development and Expansion of Diagnostic Product Line................. 4,417,555
Development of Information Products and Services and Urological
Disease Databases.................................................. 2,504,422
Development of Therapeutic Product Line.............................. 691,248
Development and Expansion of Clinical and Research Laboratories and
Lab Information System............................................. 2,141,326
</TABLE>
None of the net proceeds have been paid directly or indirectly to directors,
officers, general partners or their associates, to persons owning 10% or more of
any class of equity securities or affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
<PAGE>
ITEM 5. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical facts included in this
Report, including without limitation, statements regarding the Company's
financial position, business strategy, products, products under development,
markets, budgets and plans and objectives of management for future operations,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are disclosed under "Cautionary
Statements" and elsewhere in this Report, including, without limitation, in
conjunction with the forward-
looking statements included in this Report. All subsequent written and oral
forward-looking statements attributable to the Company, or persons on its
behalf, are expressly qualified in their entirety by the Cautionary Statements.
CAUTIONARY STATEMENTS
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH. Over the last several years,
the Company has experienced substantial growth and expanded its operational
capabilities. The Company is also planning to offer additional therapeutic
products 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 primarily has experience 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.
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 Free/
Total PSA assay currently provided by the Company or any other products under
development will be approved for reimbursement by Medicare or other third-party
payors. Furthermore, Medicare and other third party payors have, on occasion,
ceased reimbursement when certain tests are ordered for patients with certain
diagnoses while maintaining reimbursement when those tests are ordered for other
diagnoses deemed appropriate by the carrier. This practice has recently become
more prevalent with respect to Medicare. From time to time, the public and
federal government focus significant attention on reforming the health care
system in the United States. In 1997, Congress enacted the Balanced Budget Act
of 1997 that effected numerous changes to the Medicare and Medicaid programs
that could affect health care providers, including clinical laboratories. The
1997 act also revised the resource-based relative value scale system that could
affect health care providers that offer physician pathology services. These 1997
changes and 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
other legislative proposals have been introduced in Congress and state
legislatures in recent years that would effect major reforms of the health care
system and otherwise reduce health care spending. Because of the uncertainties
surrounding the nature, timing and extent of any such reimbursement changes and
reform initiatives, the Company is unable to predict the effects of any such
changes on the Company.
11
<PAGE>
UNCERTAINTIES RELATED TO ACCOUNTS RECEIVABLE. In recent years, the
Company's Medicare intermediary and certain other third-party payors have
increased the amount of time between their receipt of claims for reimbursement
and payment to the Company as well as significantly increased the documentation
and information requirements, further complicating the billing process. At March
31, 1998, the Company's average days sales in receivables was approximately 149,
compared to 142 at December 31, 1997. Such changes have resulted in the
Company's accounts receivable increasing at a rate greater than revenue growth
and, therefore, have affected the Company's cash flow from operations. There can
be no assurance that these payors will not further modify their payment
practices and impose other requirements, which could have a material adverse
affect on the Company's financial condition and results of operations. In
addition, as a result of the increase in accounts receivable, the Company's
allowance for doubtful accounts has increased. Although the Company maintains
what it believes to be an adequate reserve for doubtful accounts, there can be
no assurance that the Company will not be required to provide additional
reserves, which could have an adverse affect on the Company's results of
operations.
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, reimbursement changes 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 business. The Company currently has acquired
distribution or co-promotion rights for three therapeutic products. The Company
has recently begun to co-market two of the therapeutic products, and there can
be no assurance that the Company's efforts will be successful. There can also be
no assurance that the Company will be successful in negotiating any additional
distribution or other agreements related to therapeutic products in the future.
UNCERTAINTIES RELATED TO THE FDA APPROVAL OF THERAPEUTIC PRODUCT. The
Company has a distribution agreement with BioChem Vaccines, Inc. ("BioChem"), a
subsidiary of BioChem Pharma, Inc., for a therapeutic product for use in
treating certain types of bladder cancer. Pursuant to the distribution
agreement, BioChem is responsible for obtaining approvals from the FDA for
marketing the therapeutic product in the United States. In April 1995, BioChem
filed its initial applications with the FDA. In April 1996, the FDA advised
BioChem that its application was not approvable and requested additional data
regarding certain aspects of manufacturing and testing of the product, which
BioChem filed with the FDA through an amended application in August 1996.
Following a May 1997 site inspection of BioChem's manufacturing facilities and
operations, the FDA issued a report on FDA Form 483 indicating that additional
requirements related to BioChem's facility, process and documentation were
required before these applications could be approved. Although BioChem has
advised the Company that it believes it can satisfy the FDA requirements, there
can be no assurance that approval will be obtained.
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. The Company has
developed and introduced, on a limited basis, disease outcomes reporting
capabilities in one disease state. Further 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 directly or indirectly from
these services will be sufficient to cover or otherwise justify the costs of
development and introduction.
RISKS RELATED TO UROLOGY SUPPORT SERVICES. The Company currently provides
limited business management services, primarily accounts receivable management,
to selected urologist clients, through the Company's Urology Support Services
("USS") business. The Company intends to expand the scope of the
12
<PAGE>
USS business through additional service capabilities as well as through
additional clients. The Company is making capital investments and incurring
other expenses to develop its infrastructure and systems for USS. In addition,
there are a number of factors outside the Company's control which may delay or
hinder the expansion of USS's operations, including acceptance of the Company's
services by physicians. To the extent USS's operations do not expand as planned
or the Company does not realize revenues sufficient to offset such increased
expenses, the Company's operating margins will be adversely affected and USS may
experience delays in attaining profitability or may never become financially
viable. Certain companies, some of which have longer operating histories and
greater financial resources than those of the Company, are providing services
similar to those that USS is providing or pursuing. There can be no assurance
that the Company will be able to compete effectively with such competitors, that
additional competitors will not enter the markets or that such competition will
not make it more difficult to expand on terms beneficial to the Company.
RISKS ASSOCIATED WITH DEVELOPMENT OF DATABASE. The confidentiality of
patient medical records is subject to substantial regulation by the state and
federal governments. State and federal laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Legislation governing the dissemination and use of medical record information is
being proposed continually at both the state and federal levels. For example,
the Health Insurance Pertability and Accountability Act of 1996 requires the
Secretary of the United States Department of Health and Human Services to
recommend legislation or to promulgate regulations governing privacy standards
for individually identifiable health information. Additional legislation may
require that holders or users of confidential patient medical information
implement measures to maintain the security of such information and may regulate
the dissemination of even anonymous patient information. Physicians and other
persons providing patient information to the Company are also required to comply
with these laws and regulations. If a patient's privacy is violated, or if the
Company is found to have violated any state or federal statute or regulation
with regard to the confidentiality, dissemination or use of patient medical
information, the Company could be liable for damages, or for fines or penalties.
The Company believes that it complies in all material respects with all
applicable state and federal laws and regulations governing the confidentiality,
dissemination and use of medical record information. However, there can be no
assurance that differing interpretations of existing laws and regulations or the
adoption of new laws and regulations would not have a material adverse effect on
the ability of the Company to obtain or use patient information which, in turn,
could have a material adverse effect on the Company's plans to develop and
market its urology disease information database and related treatment. The
Company intends to continue to monitor and review the interpretation and
enactment of laws and regulations which affect the Company's plans to develop
and market its urology disease information database. In addition, the American
Medical Association (the "AMA") has issued an opinion to the effect that a
physician who does not obtain a patient's consent to the disclosure of the
patient's medical record information violates the AMA's ethical standards. While
the AMA's opinions are not law, they may influence the willingness of physicians
to obtain patient consents or to disclose patient medical information to the
Company and thus could have a material adverse effect on the Company's plans to
develop and market its urology disease information database.
UNCERTAINTY RELATED TO GOVERNMENT REGULATION. The Company's diagnostic
laboratory operations currently are required to be certified or licensed under
the federal Clinical Laboratory Improvement Act of 1976, as amended in 1988, 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.
13
<PAGE>
While the Company currently knows of no plans that the FDA has to require
FDA approval of assays developed by laboratories for in-house use, the FDA has
in the past considered drafting guidelines for such regulation. 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 medical device approval
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. Additionally, in a recent rule, the FDA stated that in some
circumstances involving in-house assays, laboratories will be required, upon
effectiveness of the rule, to indicate that the assay has not been cleared by
the FDA. There can be no assurance that such disclosure will not have an adverse
impact on reimbursement.
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.
The FDA regulates products licensed or otherwise acquired from third parties
and distributed or marketed by the Company. The manufacturers of such products
are responsible for compliance with the approval and marketing regulations of
the FDA. The ability of such third parties to address their FDA regulatory
issues is outside the Company's control. There can be no assurance that the
failure of such third parties to address their FDA regulatory matters adequately
will not have a material adverse effect on the Company's results of operations
and financial condition.
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 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 interpretations 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 MANAGED CARE. Managed care organizations are
gaining increasing control over access to health care and payment 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 increasing 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 and services are characterized by
rapidly changing technology, frequent new product introductions and enhancement
and, therefore, rapid product obsolescence. There can be no assurance 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
14
<PAGE>
or obtain access to advanced materials and technologies, or receive commercial
acceptance for its products.
UNCERTAINTIES ASSOCIATED WITH COMPETITIVE PRESSURES. 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.
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, reimbursement changes, availability and
cost of diagnostic supplies, availability and cost of logistic services, 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's operating results may continue to
fluctuate in the future.
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 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.
YEAR 2000 RISKS. Although the Company does not expect to incur significant
expenditures to address year 2000 issues, there can be no assurance that this
will be the case. Additionally, the ability of third parties with whom the
Company transacts business to address their year 2000 issues adequately is
outside the Company's control. There can be no assurance that the failure of the
Company or such third parties to address their respective year 2000 issues
adequately will not have a material adverse effect on the Company's results of
operations and financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
UROCOR, INC.
By: /s/ WILLIAM A. HAGSTROM
-----------------------------------------
William A. Hagstrom
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
May 15, 1998
By: /s/ MICHAEL N. MCDONALD
-----------------------------------------
Michael N. McDonald
VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER
May 15, 1998
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET FOR MARCH 31, 1998 AND THE STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,528,875
<SECURITIES> 11,188,744
<RECEIVABLES> 19,224,757
<ALLOWANCES> 2,762,869
<INVENTORY> 477,051
<CURRENT-ASSETS> 39,756,248
<PP&E> 14,397,988
<DEPRECIATION> 4,636,140
<TOTAL-ASSETS> 55,268,539
<CURRENT-LIABILITIES> 3,811,554
<BONDS> 0
0
0
<COMMON> 103,580
<OTHER-SE> 51,208,239
<TOTAL-LIABILITY-AND-EQUITY> 55,268,539
<SALES> 0
<TOTAL-REVENUES> 10,613,795
<CGS> 0
<TOTAL-COSTS> 4,047,992
<OTHER-EXPENSES> 5,471,485
<LOSS-PROVISION> 605,995
<INTEREST-EXPENSE> 25,258
<INCOME-PRETAX> 824,395
<INCOME-TAX> 313,000
<INCOME-CONTINUING> 511,395
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 511,395
<EPS-PRIMARY> $.05
<EPS-DILUTED> $.05
</TABLE>
