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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-28328
UROCOR, INC.
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A DELAWARE IRS EMPLOYER
CORPORATION IDENTIFICATION
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 13, 1998 $60,562,108
Number of shares of registrant's Common Stock outstanding as of March 13, 1998 10,354,216
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's proxy statement relating to the 1998 annual
meeting of stockholders have been incorporated by reference into Part III
hereof.
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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............................................................................. 16
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 16
PART II.................................................................................................... 17
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 17
6. SELECTED FINANCIAL DATA....................................................................... 19
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 20
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................................. 24
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................... 24
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......... 25
PART III................................................................................................... 26
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................ 26
11. EXECUTIVE COMPENSATION........................................................................ 26
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................ 26
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................ 26
PART IV.................................................................................................... 27
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.............................. 27
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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 complex diseases. The Company complements its diagnostic services by
marketing and co-promoting therapeutic products for certain of these diseases.
The Company also is developing and offering related information services
intended to enhance and expand services to its clients.
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 effectiveness of patient's therapy and
identify recurrence of the disease. UroCor markets these services directly to
urologists and managed care organizations through the Company's urology-focused
sales force. The UroSciences Group develops, evaluates and applies new
diagnostic products and technologies and facilitates the development and
utilization of the Company's disease information resources. The UroTherapeutics
Group was established to acquire marketing, co-promotion and other rights to
urological pharmaceutical products for use by urologists and their patients. The
Company's Disease Management Information Systems Group provides 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 health 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 may require sophisticated diagnostic and information
services and a wide range of therapeutic products and 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, pharmaceutical companies and
other entities 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 other physicians for prostate cancer, bladder cancer, kidney
stone disease and other complex urological diseases.
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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 revenues of approximately $31.7 million in 1997, constituting
approximately 96.3% of the Company's 1997 revenues.
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 from 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 Helps detect and monitor disease
Free/Total PSA* Increases specificity of PSA
TISSUE BASED
Biopsy analysis/Sextant biopsy Definitive diagnosis of prostate cancer
UroScore-Registered Trademark- Improves clinical staging, prognosis 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 generally not reimbursed by
third-party payors, including Medicare.
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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 to improve the urologist's ability to identify
possible presence of prostate cancer to be confirmed by a biopsy and for
monitoring the progress of patients being treated for this disease. 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 standard 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 small, localized tumor tissue in the
prostate and to provide increased information from the specimen which can be
used in more accurate prognosis of the disease. The Company's specimen
collection techniques, reporting capabilities and database resources 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. After
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, when
appropriate, with two different techniques, an analysis of the DNA in cell
nuclei and the use of one or more specific biomarkers, to assist the pathologist
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.
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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 intends to continue its efforts to expand its client base and
add additional products and services to its product lines. The Company also
intends to expand its wide area network link with its client base to enhance the
regular two-way communication between the Company and its customers.
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.
In addition to its focus on individual urologists 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.
UROSCIENCES GROUP
The UroSciences Group combines access to external resources at academic
centers, research institutes and other companies with the Company's internal
development, assessment and applications capabilities to produce and launch new
technologies and products.
The UroSciences Group has created unique disease specific databases from the
diagnostic specimens received from the Company's clients in order to enhance
current services and validate new 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 currently is working with urologists to obtain additional
therapy selection decisions, outcomes and claims information to add to its
existing databases. The UroSciences Group also has 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 the rapid 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. Additionally, UroCor believes that some of the technologies acquired or
in development in the Company's research and 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
The UroTherapeutics Group seeks to provide therapeutic products and services
to urologists for the care of their patients. To achieve this goal, the Company
attempts to identify opportunities within targeted disease states to license,
distribute, acquire from others or co-market urological pharmaceuticals and
related products and services used or prescribed by the urologist. The Company
intends to capitalize on its growing urology customer franchise and the skills
of its urology focused sales force to market these products and services to its
existing and future client base. The Company plans to differentiate its product
and service offerings from competitors through ancillary offerings, including
on-line computerized entry, just-in-time inventory management for the
urologist's office, procedure trays to accompany therapeutic
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interventions, data base access, reimbursement assistance, consumer direct
consultation services, oncologist consultation and economic outcomes analysis.
In October 1997, the Company entered into a co-promotion agreement with
Zeneca Pharmaceuticals, Inc. ("Zeneca") pursuant to which the Company
co-promotes Zolodex and Casodex, Zeneca's leading therapeutic products for the
treatment of advanced prostate cancer. Under the terms of the five-year
agreement, UroCor intends to utilize its sales force to market the two
therapeutic products which are hormonal therapies for patients with advanced
prostate cancer. Zeneca is the second largest supplier of anti-cancer
therapeutic products worldwide.
Pursuant to the Zeneca agreement, UroCor will generate revenues based on the
attainment of mutually agreed upon sales goals. UroCor expects to promote the
therapeutic products through its relationships with its urologist clients as
well as to a broad group of urologists not currently part of the Company's
client base. The Company completed an expansion of its field sales organization
during the fourth quarter of 1997 in anticipation of the Zeneca co-promotion and
potential future UroTherapeutics product and service offerings.
The Company also entered into an agreement in December 1994 with BioChem
Vaccines, Inc. ("BioChem"), a subsidiary of BioChem Pharma, Inc., granting the
Company exclusive distribution rights in the United States for PACIS-TM- 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, BioChem 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 BioChem has obtained such FDA approval.
BioChem has advised the Company that it expects the final stages of the FDA
review process leading to the approval of the product will be completed around
mid-1998. 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 Zeneca and BioChem agreements, 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 a secure wide area network that provides enhanced
two-way communication between UroCor and certain of its physician clients.
Through this network, the physician clients receive advanced case reports on
current diagnostic findings. The Company intends to expand the number of clients
accessing this network and increase capabilities to provide clients with the
ability to 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
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database and integrate the use of the information obtained from the database
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.
UROLOGY SUPPORT SERVICES. Building upon existing relationships with
urologists, the Company intends to offer a broad range of business management
services to urologists. The Company currently provides certain business
management services to selected clients through the Urology Support Services
("USS") business of the Disease Management Information Systems Group. The
Company intends to expand the scope of the USS business through additional
service capabilities as well as through additional clients.
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 other therapeutic products currently compete or will
compete with the Zeneca drugs being co-promoted by UroCor and the Company's
anticipated BCG therapy product for bladder cancer. Several competitors,
including Schering-Plough Corporation, Hoescht Marion Roussel, Inc. and TAP
Pharmaceuticals, Inc., compete with the Zeneca products. In addition, 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
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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.
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. In a recent rule, the FDA stated that in some circumstances
involving in-house assays, the laboratory 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 this will not have an adverse impact on reimbursement. 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. FDA regulatory actions may have a negative
impact on the Company's ability to purchase from third parties diagnostic kits
that have not received FDA clearance. 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 FDA regulates the products licensed or otherwise acquired from third
parties and distributed or marketed by the UroTherapeutics Group. The
manufacturers of such products are responsible for compliance with the approval
and marketing regulations of the FDA. If the Company should decide to develop or
manufacture its own therapeutic products, such products would require FDA
approval.
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
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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 regulations applicable to such testing programs.
The federal Anti-Fraud and Abuse Amendments to the Social Security Act (the
"Anti-Fraud and Abuse Amendments") proscribe the offering, payment, solicitation
or receipt of remuneration (including any kickback, bribe or rebate), directly
or indirectly, overtly or covertly, in cash or in kind, for (i) the referral of
patients or arranging for the referral of patients to receive services for which
payment may be made in whole or in part under a "federal health care program"
(defined generally as "any plan or program that provides health benefits,
whether directly, through insurance, or otherwise, which is funded directly, in
whole or in part, by the United States Government") other than the federal
Employees Health Benefit Program, 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 Anti-Fraud and Abuse Amendments 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. Civil sanctions
may include, among others, exclusion from participation in the Medicare and
state health care programs.
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. Law enforcement authorities, the courts and
Congress have demonstrated a willingness to look behind the formalities of an
entity's structure to determine the underlying purpose of payments between
health care providers and potential referral sources. 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 Anti-Fraud and Abuse Amendments. Some courts have held that
the Anti-Fraud and Abuse Amendments may be violated if merely one purpose of a
payment arrangement is to induce future referrals.
Congress made sweeping changes to various health care fraud provisions in
the "Health Insurance Portability and Accountability Act of 1996" ("HIPAA").
HIPAA called upon the Secretary of DHHS to establish a program aimed at
controlling fraud and abuse. HIPAA also expanded the criminal laws and sanctions
to strengthen the enforcement capabilities of the federal government in
attempting to prevent health care fraud and abuse. HIPAA has increased the risk
of fraud investigations. HIPAA called for additional potential penalties and
sanctions, including increased monetary penalties and the exclusion of (i)
individuals with direct or indirect ownership or control interest in a
sanctioned entity if the individual knows or should know of the action
constituting the basis for the conviction or exclusion of the entity, and (ii)
officers or managing employees of the entity. Because of such increased scrutiny
and such broad interpretations, the Anti-Fraud and Abuse Amendments could limit
the manner in which the Company conducts its business. Although the Company
believes that it currently complies with the Anti-Fraud and Abuse Amendments, no
assurance can be given regarding compliance in any particular factual situation.
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The OIG has promulgated regulations to clarify that certain investment and
payment practices in the health care industry would not violate the Anti-Fraud
and Abuse Amendment. There can be no assurance that any additional safe harbor
regulations will be promulgated or that they will provide protection for any the
of the Company's activities
Another federal provision, the Stark self-referral and payment prohibition,
generally forbids, absent qualifying for one of the exceptions, a physician from
making referrals for the furnishing of any "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 law includes any
direct or indirect "compensation arrangement" with an entity for payment of any
remuneration, and any direct or indirect "ownership or investment interest" in
the entity. Penalties for violating the Stark law include denial of payment for
any service rendered by an entity in violation of the prohibition, civil money
penalties and exclusion 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 laws are very restrictive, prohibit submission of claims for payment
for prohibited referrals and provide for the imposition of civil monetary and
criminal penalties. The Stark law and similar state provisions are very broad in
scope and the agencies responsible for their investigation and prosecution have
considerable discretion. Although the Company believes it has no prohibited
relationships with any of its physician clients, 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 or
certain state programs, 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 1995, 1996 and 1997, the Company received approximately 58%, 52% and 47%,
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. From
9
<PAGE>
time to time, federal budget legislation has instituted changes in Medicare's
fee schedule relating to reimbursement for laboratory services which constitute
a significant portion of the services furnished by the Company. Each such change
lowered Medicare reimbursement schedules for such services. Other legislative
proposals have been made which, if enacted, could have an adverse effect on
reimbursement of laboratory services. In addition, a significant portion of the
services furnished by the Company are characterized for the purposes of the
Medicare program as physician pathology services which are reimbursed by
Medicare based on a methodology known as resource-based relative value scale
("RBRVS"). In 1997, Congress revised the RBRVS system and changed the manner in
which fees are updated. This change and any future changes to the RBRVS system
could have an adverse effect on the Company's Medicare reimbursement for
physician pathology services.
Reimbursement rates for some services of the type or similar to the type
performed by the Company have been established by Medicare and some third-party
payors, but have not been established for all services or by all insurance
carriers with respect to any particular service. 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 use" 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 retroactively audit and review
its prior payments to the Company, and may determine that certain of those
payments must be returned. The Medicare carrier also may impose prepayment
review on some or all claims for payment before reimbursing the Company. With
respect to other third-party payors, a positive coverage determination, or
reimbursement without such determination, by one or more third-party payors does
not assure reimbursement by other third-party payors. Significant disapprovals
of payment for any of the Company's services by various carriers, reductions or
delays in the establishment of reimbursement rates and carrier limitations on
the coverage of the Company's services or the use of the Company as a service
provider could have a material adverse effect on the Company's results of
operations and financial condition.
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.
10
<PAGE>
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 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, 1997, the Company had 318 full-time and 30 part-time
employees, of which 116 were employed in diagnostic services operations and
support, 123 in sales and marketing, 20 in scientific research and development,
37 in information systems operations and development and 52 in general and
administrative. At December 31, 1997, the Company employed, full time, 12
persons with M.D. degrees and 7 persons with Ph.D. degrees.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 "--Risk
Factors" 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.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY. SEE
ALSO "--SPECIAL NOTE REGARDING FORWARD-LOOKING 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
11
<PAGE>
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.
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.
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. 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 RBRVS 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 reform initiatives, the
Company is unable to predict the effects of any such changes on the Company.
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
December 31, 1997, the Company's average days sales in receivables was
approximately 142, compared to 97 at December 31, 1996. 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. The Company recently
increased its reserve for doubtful accounts to a level it believes to be
adequate; 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,
12
<PAGE>
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 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, 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 USS business of the Disease
Management Information Services Group. The Company intends to expand the scope
of the 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. A key component of the
Company's disease management strategy is the development of disease specific and
general urology disease information databases from the diagnostic specimens
received by the UroDiagnostics Group and other relevant data being collected
from urologists and others. State and federal laws and regulations govern both
the disclosure and
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<PAGE>
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
HIPAA requires the Secretary of the DHHS 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
databases and related services. 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 databases. In addition to state and
federal regulation, 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 databases.
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 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.
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
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<PAGE>
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 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, 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
15
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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.
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 2. PROPERTIES
The Company leases approximately 59,000 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 $48,000.
The Company believes that its leased facilities are adequate for its 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, each quarter of
1997 and the first quarter of 1998 through March 13, 1998, 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 Common Stock in May 1996, there was no
market for the Common Stock.
<TABLE>
<CAPTION>
1996 1997 1998
PRICE RANGE PRICE RANGE PRICE RANGE
------------- ------------------- -------------------
HIGH LOW HIGH LOW HIGH LOW
--- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter(1).............. -- -- 11 1/2 7 7/8 7 3/4 5 11/16
Second Quarter(2)............. 18 10 1/4 10 1/4 6 1/2 -- --
Third Quarter................. 16 8 1/4 9 5/8 5 1/2 -- --
Fourth Quarter................ 14 8 1/4 10 7/8 5 3/16 -- --
</TABLE>
- ------------------------
(1) Through March 13, 1998.
(2) From May 17, 1996 through June 30, 1996. The initial public offering price
was $11.00 per share.
As of March 13, 1998, the last sales price per share of the Common Stock, as
reported by The Nasdaq Stock Market, was $7.00.
As of March 13, 1998, the Company's 10,354,216 shares of Common Stock
outstanding were held by 112 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
During 1997, the Company issued a total of 131,361 shares of Common Stock
for an aggregate consideration of $517,851 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) of
the Securities Act of 1933, as amended.
USE OF PROCEEDS
The effective date of the registration statement for the Company's initial
public offering of Common Stock and for which the following information
regarding use of proceeds is being disclosed was May 16, 1996, and the
Securities and Exchange Commission file number assigned to the registration
statement was 333-3182.
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From the effective date of the registration statement through December 31,
1997, the following table identifies the purposes and amounts of the net
proceeds from the offering paid directly or indirectly to others:
<TABLE>
<S> <C>
Construction of plant, building and facilities......................... $ --
Purchase and installation of machinery and equipment................... 3,639,352
Purchases of real estate............................................... --
Acquisition of other business(es)...................................... --
Repayment of indebtedness.............................................. 1,861,438
Working capital........................................................ 3,641,287
Temporary investments:
Short-term commercial paper.......................................... 14,891,057
Long-term corporate and treasury notes............................... 2,012,656
Cash equivalents..................................................... --
Other purposes:
Development and expansion of diagnostic product line................. 3,932,787
Development of information products and services and urological
disease databases.................................................. 2,424,486
Development of therapeutic product line.............................. 612,916
Development and expansion of clinical and research laboratories and
laboratory information system...................................... 1,533,880
</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 other affiliates.
18
<PAGE>
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, 1997, 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,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $ 9,348 $ 14,531 $ 19,758 $ 26,522 $ 32,952
Operating expenses:
Direct cost of services and products.............. 3,893 5,891 7,354 9,966 12,574
Selling, general and administrative expenses...... 6,308 8,765 9,423 12,735 16,822
Research and development.......................... 1,252 1,969 2,267 2,448 2,225
---------- ---------- ------------ ---------- ---------
Total operating expenses........................ 11,453 16,625 19,044 25,149 31,621
---------- ---------- ------------ ---------- ---------
Income (loss) from operations..................... (2,105) (2,094) 714 1,373 1,331
---------- ---------- ------------ ---------- ---------
Other income (expense).............................. (63) (203) (181) 990 1,484
---------- ---------- ------------ ---------- ---------
Income (loss) before income taxes................... (2,168) (2,297) 533 2,363 2,815
---------- ---------- ------------ ---------- ---------
Income tax benefit.................................. -- -- -- -- 1,437
---------- ---------- ------------ ---------- ---------
Net income (loss)................................... $ (2,168) $ (2,297) $ 533 $ 2,363 $ 4,252
---------- ---------- ------------ ---------- ---------
---------- ---------- ------------ ---------- ---------
Basic net income (loss) per common share(1)......... $ (.48) $ (.43) $ .09 $ .27 $ .42
---------- ---------- ------------ ---------- ---------
---------- ---------- ------------ ---------- ---------
Weighted average common and common equivalent shares
outstanding(1).................................... 4,505 5,376 6,156 8,731 10,203
---------- ---------- ------------ ---------- ---------
---------- ---------- ------------ ---------- ---------
Diluted net income (loss) per common share(1)....... $ (.47) $ (.40) $ .08 $ .24 $ .38
---------- ---------- ------------ ---------- ---------
---------- ---------- ------------ ---------- ---------
Weighted average common and common equivalent shares
outstanding--assuming dilution(1)................. 4,612 5,680 6,761 9,832 11,053
---------- ---------- ------------ ---------- ---------
---------- ---------- ------------ ---------- ---------
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable investments..................... $ 1,193 $ 1,823 $ 3,125 $ 33,475 $ 25,606
Working capital..................................... 1,618 2,911 5,904 34,910 37,389
Total assets........................................ 5,017 7,946 12,494 50,270 54,452
Long-term debt...................................... 1,009 2,063 1,666 659 218
Accumulated deficit................................. (12,590) (14,887) (14,355) (11,991) (7,739)
Total stockholders' equity.......................... 1,367 3,869 8,425 45,687 50,755
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 to the Financial Statements.
19
<PAGE>
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 Notes thereto included elsewhere in this Annual Report
on Form 10-K. 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 the Securities Exchange Act of 1934, as amended.
See "Business-- Special Note Regarding Forward-Looking Statements".
OVERVIEW
UroCor provides a broad range of diagnostic services for the clinical
management of certain urological cancers and complex diseases. The Company
complements its diagnostic services by marketing and co-promoting therapeutic
products for certain of these diseases. The Company also is developing and
offering related information services intended to enhance and expand services to
its clients. 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, 1997, approximately 47%,
38%, 10% and 5% of the Company's revenue was attributable to Medicare, private
insurance and managed care, individual patients, and physicians and hospitals,
respectively.
In 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 for
marketing approval by the FDA.
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,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenue................................................................. 100.0% 100.0% 100.0%
Operating expenses:
Direct cost of services and products.................................. 37.2 37.6 38.2
Selling, general and administrative expenses.......................... 47.7 48.0 51.0
Research and development.............................................. 11.5 9.2 6.8
--------- --------- ---------
Total operating expenses............................................ 96.4 94.8 96.0
--------- --------- ---------
Income from operations.................................................. 3.6 5.2 4.0
Other income (expense).................................................. (0.9) 3.7 4.5
--------- --------- ---------
Income before income taxes.............................................. 2.7 8.9 8.5
Income taxes............................................................ -- -- 4.4
--------- --------- ---------
Net income.............................................................. 2.7% 8.9% 12.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
20
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue increased 24.2%, from approximately $26.5 million in 1996
to approximately $33.0 million in 1997. This increase was due primarily to a
27.0% increase in case volume attributable to expansion of the Company's client
base from 1,895 to 2,150 urologists in December 1996 and 1997, respectively,
increased utilization of the Company's diagnostic products and services by
existing clients and increased utilization of the Company's kidney stone product
line. Case volume increased at a higher rate than revenue primarily due to the
continued expansion of the kidney stone product line introduced in 1996 and an
increase in serum based tests, each of which generally has lower average selling
prices than those of most of the Company's other products.
DIRECT COST OF SERVICES AND PRODUCTS. Direct cost of services and products
increased 26.2%, from approximately $10.0 million in 1996 to approximately $12.6
million in 1997. This increase was due principally to higher personnel costs and
supply and distribution costs, resulting primarily from increased case volume
and service enhancement initiatives. As a percentage of revenue, direct expenses
increased to 38.2% for 1997 compared to 37.6% in 1996. This increase was due
principally to continued growth of the Company's kidney stone and serum based
tests, each of which has lower profit margins than most of the Company's other
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 32.1%, from approximately $12.7 million in
1996 to approximately $16.8 million in 1997. This increase was due principally
to higher personnel costs related to expansion of marketing, sales staff and
management information services personnel, increased provision for doubtful
accounts due principally to higher revenues and increased accounts receivable
and expanded investor relations activities. In the fourth quarter of 1997, the
Company increased the provision for doubtful accounts by an additional $600,000
charge beyond the normal level of provision. As a percentage of revenue,
selling, general and administrative expenses increased to 51.0% for 1997
compared to 48.0% in 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 9.1%,
from approximately $2.4 million in 1996 to approximately $2.2 million in 1997.
This decrease was due primarily to timing of completed external research
activities. As a percentage of revenue, research and development expenses
decreased to 6.8% for 1997 compared to 9.2% in 1996.
OTHER INCOME (EXPENSE). Interest income increased from approximately $1.2
million in 1996 to approximately $1.6 million in 1997 due principally to the
increase in cash, cash equivalents, and investments resulting from a full year
of proceeds of the Company's initial public offering of Common Stock in May
1996. Interest expense decreased 30.9%, from approximately $226,000 in 1996 to
approximately $156,000 in 1997, due primarily to a decrease in obligations under
capitalized leases and the repayment of the Company's bank credit facility,
which the Company did not renew upon its expiration in February 1997. The
Company had no borrowings under the facility during 1997, but had borrowings
thereunder during 1996.
INCOME TAXES. Income tax benefits of $1.4 million for 1997 reflected a
one-time benefit to record the future tax benefits of loss carryforwards and
other deferred tax items. Earnings in future periods will include Federal and
state income tax provisions, currently estimated at 38% of pretax income.
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
21
<PAGE>
introduction of the kidney stone product line and an increase in serum based
tests, each of which generally have lower average selling prices than 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 was 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 completed in 1996 that were sponsored and funded
by the Company. 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.
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 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, availability and cost of logistic services, changes
in the mix of products sold, the complexity of accounts receivable collection,
the timing and costs of new product and technology introductions by the Company
or its competitors, retention and expansion of the Company's sales force and
timing of payments from Medicare and other third-party payors.
22
<PAGE>
The Company's results of operations for the fourth quarter of 1997 include a
$1.4 million income tax benefit and a charge of $600,000 to increase the
allowance for doubtful accounts.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------------------------------------------------------------------------
1995 1996
------------------------------------------ ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. $ 4,619 $ 4,824 $ 4,784 $ 5,531 $ 5,908 $ 6,449 $ 6,476 $ 7,689
Operating Expenses:
Direct costs of services and
products.......................... 1,658 1,749 1,849 2,098 2,138 2,390 2,576 2,861
Selling, general and administrative
expenses.......................... 2,255 2,342 2,276 2,550 2,862 3,104 3,159 3,611
Research and development............ 558 540 540 629 644 649 540 615
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.............. 148 193 119 254 264 306 201 602
Other income (expense).............. (56) (63) (40) (22) (33) 161 434 428
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes.......... 92 130 79 232 231 467 635 1,030
Income tax benefit.................. -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income.......................... $ 92 $ 130 $ 79 $ 232 $ 231 $ 467 $ 635 $ 1,030
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1997
------------------------------------------
Q1 Q2 Q3 Q4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue............................. $ 8,079 $ 7,795 $ 7,786 $ 9,293
Operating Expenses:
Direct costs of services and
products.......................... 2,981 2,924 3,171 3,499
Selling, general and administrative
expenses.......................... 3,690 3,991 3,953 5,188
Research and development............ 610 611 498 506
--------- --------- --------- ---------
Income from operations.............. 798 269 164 100
Other income (expense).............. 403 371 358 352
--------- --------- --------- ---------
Income before income taxes.......... 1,201 640 522 452
Income tax benefit.................. -- -- -- 1,437
--------- --------- --------- ---------
Net income.......................... $ 1,201 $ 640 $ 522 $ 1,889
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and cash equivalents of
approximately $6.9 million, short-term marketable investments of $16.7 million
and long-term marketable investments of approximately $2.0 million. Such
marketable investments consisted principally of high-grade fixed income
securities, with a maturity of less than two years. As of December 31, 1997, the
Company's working capital was approximately $37.4 million.
Accounts receivable, net of allowance for doubtful accounts, totaled
approximately $13.5 million at December 31, 1997, an increase of approximately
$5.3 million from December 31, 1996 or 65.4%. At December 31, 1997, the
Company's average number of days sales in receivables was approximately 142
compared to approximately 97 at December 31, 1996. During 1996 and 1997, the
Company's Medicare intermediary and certain other third-party payors continued a
general trend of increasing the time between receipt of claims for reimbursement
and payment to the Company. The increase in accounts receivable for 1997 was due
primarily to payor delays caused by systems changes enacted by several of the
Company's larger payors as well as additional documentation requirements imposed
by Medicare and other third party payors which further complicated the billing
process. The Company is working with these payors and its physician clients to
resolve billing and payment 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 the results of its claims
and collections efforts.
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. In the fourth quarter of 1997, such charges included an additional
$600,000 provision to increase the allowance for doubtful accounts beyond the
normal level of such provisions.
Operating activities used net cash of approximately $1.8 million in 1997,
provided net cash of approximately $480,000 in 1996 and used net cash of
approximately $533,000 in 1995. The net cash used by operating activities in
1997 was primarily the result of net income of approximately $4.3 million and
depreciation and amortization of approximately $1.6 million offset in part by an
approximately $5.4 million increase in accounts receivable, an approximately
$1.7 million benefit from deferred income taxes and an approximately $560,000
decrease in accrued compensation. The deferred tax benefit was the result of a
decrease in the valuation allowance related to net deferred tax assets due to
utilization of part of the net
23
<PAGE>
operating loss carryforward by the Company's 1997 operations and due to
management's reassessment of the Company's ability to realize its remaining net
deferred tax asset based upon its history of operating results for 1996 and 1997
and projected operating results for 1998. Accrued compensation decreased because
the Company did not accrue a management bonus for 1997 and did accrue a bonus
for 1996.
Net cash used by investing activities for 1997 was approximately $7.1
million and consisted primarily of capital expenditures of approximately $5.8
and purchases of short-term investments of approximately $3.0 million, offset by
maturities of long-term investments of approximately $2.0 million. Net cash
provided by financing activities was approximately $18,000 for 1997, consisting
primarily of exercises of stock warrants of approximately $518,000 and stock
options of approximately $124,000, offset by principal payments under capital
leases and other indebtedness of approximately $623,000.
The Company's capital expenditures of approximately $5.8 million in 1997
were primarily for computer hardware and software, furniture and fixtures and
software development for the Company's information services. Of the total
amount, approximately $1.1 million 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 paid current income taxes of approximately $350,000 during 1997.
At December 31, 1997, the Company estimated net operating loss carryforwards of
approximately $3.0 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.
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 and applications are year 2000 compliant will not be material to its
financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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-1 through F-16 of this Annual
Report on Form 10-K, and are incorporated herein by reference.
24
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of stockholders to be held June
22, 1998 under the caption "Election of Directors" and "Executive Officers and
Compensation", which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of stockholders to be held June
22, 1998 under the caption "Executive Officers and Compensation", which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of stockholders to be held June
22, 1998 under the caption "Security Ownership of Certain Beneficial Owners and
Management", which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of stockholders to be held June
22, 1998 under the caption "Certain Relationships and Related Transactions",
which information is incorporated herein by reference.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS PAGE
---------
Index to Financial Statements................................................... F-1
Report of Independent Public Accountants........................................ F-2
Balance Sheets as of December 31, 1996 and 1997................................. F-3
Statements of Operations for the years ended December 31, 1995, 1996 and 1997... F-4
Statements of Stockholders' Equity for the years ended December 31, 1995, 1996
and 1997........................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997... F-6
Notes to Financial Statements................................................... F-7
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants........................................ S-1
Schedule II--Valuation and Qualifying Accounts.................................. S-2
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
(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.
</TABLE>
27
<PAGE>
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. Second Amended and Restated 1992 Stock Option Plan (incorporated by reference to the
Registrant's Form 10-Q for the quarterly period ended June 30, 1997, filed with the Commission on
August 11, 1997).
10.2 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).
10.3 Amendment No. 1 to the Lease Agreement dated April 15, 1994, between Presbyterian Health Foundation and
UroCor, Inc. (incorporated by reference to the Registrant's Form 10-Q for the quarterly period ended
June 30, 1997, filed with the Commission on August 11, 1997).
10.4+ 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).
10.5+ 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).
10.6+ 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).
10.7+ 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).
10.8+ 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).
10.9+ 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).
10.10+* 1997 Management Incentive Compensation Plan.
10.11 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).
10.12 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).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.13 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).
10.14+ The UroCor, Inc. 1997 Non-Employee Director Stock Option Plan (incorporated by reference to the
Registrant's Form 10-Q for the quarterly period ended June 30, 1997, filed with the Commission on
August 11, 1997).
10.15* Promissory note between Michael N. McDonald and UroCor, Inc., dated December 11, 1997.
10.16* Promissory note between Lou Rye Carmichael and UroCor, Inc., dated June 30, 1997.
23.1* Consent of Arthur Andersen LLP.
</TABLE>
29
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1996 and 1997....................................... F-3
Statements of Operations for the years ended December 31, 1995, 1996 and 1997......... F-4
Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and
1997................................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997......... 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 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
January 28, 1998
F-2
<PAGE>
UROCOR, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 15,796,070 $ 6,896,033
Short-term marketable investments............................................... 12,968,163 16,697,067
Accounts receivable, net of allowance for doubtful accounts of $1,123,562 in
1996 and $2,619,485 in 1997................................................... 8,188,715 13,541,416
Prepaid expenses................................................................ 666,662 988,659
Laboratory supplies, at average cost............................................ 683,408 497,639
Deferred tax asset, net......................................................... 80,000 1,470,781
Other current assets............................................................ 450,796 776,699
-------------- -------------
Total current assets.......................................................... 38,833,814 40,868,294
-------------- -------------
LONG-TERM MARKETABLE INVESTMENTS.................................................. 4,710,858 2,012,656
PROPERTY AND EQUIPMENT, net....................................................... 4,745,662 9,010,582
NON-CURRENT DEFERRED TAX ASSET, net............................................... -- 358,684
INTANGIBLE AND OTHER ASSETS, net.................................................. 1,979,575 2,201,903
-------------- -------------
Total assets.................................................................. $ 50,269,909 $ 54,452,119
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 1,960,446 $ 2,263,645
Accrued compensation............................................................ 1,225,976 665,817
Current installments of obligations under capital leases........................ 623,446 441,435
Other accrued liabilities....................................................... 114,352 108,421
-------------- -------------
Total current liabilities..................................................... 3,924,220 3,479,318
OBLIGATIONS UNDER CAPITAL LEASES, net of current installments..................... 659,131 217,697
-------------- -------------
Total liabilities............................................................. 4,583,351 3,697,015
-------------- -------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value--authorized 6,000,000 shares at
December 31, 1996 and 1997; issued in series; no shares outstanding at
December 31, 1996 and 1997.................................................... -- --
Common stock, $.01 par value, authorized 20,000,000 shares at December 31, 1996
and 1997; 10,101,307 shares issued and outstanding at December 31, 1996 and
10,345,616 shares issued and outstanding at December 31, 1997................. 101,013 103,456
Additional paid-in capital...................................................... 57,576,724 58,390,646
Accumulated deficit............................................................. (11,991,179) (7,738,998)
-------------- -------------
Total stockholders' equity.................................................... 45,686,558 50,755,104
-------------- -------------
Total liabilities and stockholders' equity.................................... $ 50,269,909 $ 54,452,119
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
UROCOR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE............................................................. $ 19,758,170 $ 26,522,205 $ 32,951,514
OPERATING EXPENSES:
Direct cost of services and products.............................. 7,353,676 9,965,639 12,574,164
Selling, general and administrative expenses...................... 9,423,216 12,735,294 16,821,240
Research and development.......................................... 2,267,102 2,447,501 2,225,162
------------- ------------- -------------
Total operating expenses........................................ 19,043,994 25,148,434 31,620,566
------------- ------------- -------------
INCOME FROM OPERATIONS.............................................. 714,176 1,373,771 1,330,948
OTHER INCOME (EXPENSE):
Interest income................................................... 108,983 1,215,144 1,640,003
Interest expense.................................................. (290,473) (225,531) (155,942)
------------- ------------- -------------
Total other income (expense).................................... (181,490) 989,613 1,484,061
------------- ------------- -------------
Income before income taxes.......................................... 532,686 2,363,384 2,815,009
Income tax benefit.................................................. -- -- 1,437,172
------------- ------------- -------------
NET INCOME.......................................................... $ 532,686 $ 2,363,384 $ 4,252,181
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER SHARE:
Basic:
Net Income Per Common Share....................................... $ .09 $ .27 $ .42
------------- ------------- -------------
------------- ------------- -------------
Weighted Average Common and Common Equivalent Shares
Outstanding..................................................... 6,156,145 8,731,369 10,203,081
------------- ------------- -------------
------------- ------------- -------------
Diluted:
Net Income Per Common Share--Assuming Dilution.................... $ .08 $ .24 $ .38
------------- ------------- -------------
------------- ------------- -------------
Weighted Average Common and Common Equivalent Shares
Outstanding--Assuming Dilution.................................. 6,761,457 9,831,546 11,052,540
------------- ------------- -------------
------------- ------------- -------------
</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 COMMON
CLASS A STOCK CLASS B STOCK STOCK
---------------------- ---------------------- ---------------------- ---------
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES
--------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net income............................. -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ----- ---------
BALANCE AT DECEMBER 31, 1995........... 5,706,395 $ 57,064 513,093 $ 5,131 66,666 $ 667 69,188
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
Initial Public Offering.............. -- -- -- -- -- -- 3,450,000
Exercise of warrants................. -- -- -- -- -- -- 63,059
Exercise of stock options............ -- -- -- -- -- -- 36,700
Stock Option--Compensation Expense..... -- -- -- -- -- -- --
Net income............................. -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ----- ---------
BALANCE AT DECEMBER 31, 1996........... -- $ -- -- $ -- -- $ -- 10,101,307
Stock Issuance--Exercise of warrants... -- -- -- -- -- -- 131,361
Exercise of stock options.............. -- -- -- -- -- -- 112,948
Stock Option--Compensation Expense..... -- -- -- -- -- -- --
Net income............................. -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ----- ---------
BALANCE AT DECEMBER 31, 1997........... -- $ -- -- $ -- -- $ -- 10,345,616
--------- ----------- --------- ----------- --------- ----- ---------
--------- ----------- --------- ----------- --------- ----- ---------
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
PAR VALUE CAPITAL DEFICIT EQUITY
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
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............ 692 25,124 -- 25,816
Net income............................. -- -- 532,686 532,686
----------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1995........... $ 692 $22,716,005 ($14,354,563) $8,424,996
Stock issuance--Conversion of
Preferred, Class A, and Class B...... 64,824 (1,962) -- --
Initial Public Offering.............. 34,500 34,515,359 -- 34,549,859
Exercise of warrants................. 630 181,903 -- 182,533
Exercise of stock options............ 367 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........... $ 101,013 $57,576,724 ($11,991,179) $45,686,558
Stock Issuance--Exercise of warrants... 1,314 516,537 -- 517,851
Exercise of stock options.............. 1,129 122,437 -- 123,566
Stock Option--Compensation Expense..... -- 174,948 -- 174,948
Net income............................. -- -- 4,252,181 4,252,181
----------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1997........... $ 103,456 $58,390,646 $(7,738,998) $50,755,104
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
UROCOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 532,686 $ 2,363,384 $ 4,252,181
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization....................................... 875,557 1,115,994 1,597,002
Benefit from deferred income taxes.................................. -- -- (1,749,465)
Stock option compensation expense................................... -- 129,607 174,948
Other............................................................... 4,480 711 --
Changes in current assets and liabilities:
Increase in accounts receivable................................... (1,944,991) (3,783,615) (5,352,701)
Increase in prepaid expense....................................... (142,600) (245,014) (321,997)
Decrease (increase) in laboratory supplies........................ 89,188 (449,263) 185,769
Increase in other current assets.................................. (79,901) (410,934) (325,903)
Increase in accounts payable...................................... 101,249 1,406,957 303,199
(Decrease) increase in accrued compensation....................... 188,776 352,386 (560,159)
Decrease in other accrued liabilities............................. (157,548) (516) (5,931)
------------ ------------ ------------
Net cash (used in) provided by operating activities............. (532,775) 479,697 (1,803,057)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term marketable investments, net of maturities... -- (5,975,500) (2,999,483)
Purchases of long-term marketable investments, net of maturities.... -- (11,703,521) 1,968,781
Capital expenditures................................................ (1,362,599) (3,414,678) (5,814,064)
Proceeds from capital leases........................................ 845,238 385,511 --
Intangible and other assets......................................... (692,973) (242,278) (270,186)
------------ ------------ ------------
Net cash used in investing activities............................. (1,210,334) (20,950,466) (7,114,952)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock issuances................................... 3,997,800 34,549,859 --
Proceeds from exercise of stock options............................. 25,816 36,179 123,566
Proceeds from exercise of warrants.................................. -- 182,533 517,851
Principal payments under capital lease obligations and other
indebtedness...................................................... (678,135) (927,028) (623,445)
Proceeds from line of credit........................................ 1,200,000 600,000 --
Payments on line of credit.......................................... (1,500,000) (1,300,000) --
------------ ------------ ------------
Net cash provided by financing activities......................... 3,045,481 33,141,543 17,972
Net (decrease) increase in cash and cash equivalents.................. 1,302,372 12,670,774 (8,900,037)
CASH AND CASH EQUIVALENTS, beginning of year.......................... 1,822,924 3,125,296 15,796,070
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.............................. $ 3,125,296 $ 15,796,070 $ 6,896,033
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................................. $ 262,896 $ 198,476 $ 106,147
Cash paid for income taxes.......................................... 18,000 48,000 350,000
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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, 1997
1. THE COMPANY:
UroCor, Inc. ("the Company"), a Delaware corporation, provides a broad array
of diagnostic services and markets therapeutic products and information services
to urologists and managed care organizations across the U.S. The Company assists
its customers to better manage their patients' outcomes 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 and 1997. Marketable securities at December 31, 1997
consist primarily of debt securities with maturities as great as two years. The
aggregate cost of marketable securities at December 31, 1997 was approximately
$18.7 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 and 1997, 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 to five years, using
the straight-line method. Capitalized software development costs are reviewed
internally annually for feasibility and impairment. Internal software
development costs which were capitalized to property and equipment during the
years ended December 31, 1995, 1996 and 1997 were $35,000, $346,000, and
$1,122,000, 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 using the straight-line method.
F-7
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(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 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, 1997 the Company had
commitments under external research contracts totaling approximately $203,000
for 1998 and $1,000 for 1999.
(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 1995, 1996 and 1997, approximately 58%, 52%, and 47%, 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. The Company receives
reimbursement for substantially all of its current services 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 PER COMMON SHARE. As required, the Company has adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), which
simplifies the computation of earnings per share ("EPS") and makes the
calculation comparable to international EPS standards. SFAS 128 requires that
EPS be restated for all prior periods presented. The effect of dilutive
securities is calculated using the treasury stock method and the average market
price of common stock for each period.
(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 1996
balance sheet to conform with the 1997 presentation. Total assets and net income
for 1996 were not affected by the reclassifications.
F-8
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Laboratory equipment...................................................... $ 2,068,774 $ 2,258,267
Computer equipment and software........................................... 3,996,853 8,375,203
Office furniture, equipment and improvements.............................. 1,590,672 2,456,994
------------- -------------
7,656,299 13,090,464
Less--Accumulated depreciation and amortization........................... (2,910,637) (4,079,882)
------------- -------------
$ 4,745,662 $ 9,010,582
------------- -------------
------------- -------------
</TABLE>
The depreciable lives for property and equipment are as follow:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Laboratory equipment.......................................................................... 3 to 5
Computer equipment and software............................................................... 2 to 5
Office furniture, equipment and improvements.................................................. 3 to 10
</TABLE>
4. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Licenses, options, patents and trademarks................................... $ 591,036 $ 814,511
Less--Accumulated amortization.............................................. (9,740) (65,650)
------------ ------------
581,296 748,861
Distribution agreement (Note 7)............................................. 1,250,000 1,250,000
Deposits and other.......................................................... 148,279 203,042
------------ ------------
$ 1,979,575 $ 2,201,903
------------ ------------
------------ ------------
</TABLE>
5. LINE OF CREDIT:
The Company had a $3.0 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. The Company did not renew this line of credit upon its
expiration in February 1997. There was no balance outstanding on the line of
credit at December 31, 1996 and the average balance outstanding was $55,000
during 1996, with an average interest rate of 9.80%. Interest was paid monthly
at prime (8.25% at December 31, 1996) plus 1.5%.
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 reimbursement from the lessor. The lease
payments paid by the Company are for three to four years and provide for
repayment of the equipment cost plus an interest charge. The Company accounts
for these
F-9
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASES: (CONTINUED)
arrangements as capital leases with the capital asset amortized over the lease
term. At December 31, 1996 and 1997, the gross amount of property and equipment
and related amortization recorded under capital leases was as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Laboratory equipment...................................................... $ 1,694,941 $ 1,593,706
Computer equipment........................................................ 954,282 914,400
Office furniture and equipment............................................ 748,140 638,056
------------- -------------
3,397,363 3,146,162
Less--Accumulated depreciation and amortization........................... (2,233,152) (2,605,965)
------------- -------------
$ 1,164,211 $ 540,197
------------- -------------
------------- -------------
</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 1995, 1996
and 1997 approximated $352,000, $503,000 and $887,000, respectively.
Future minimum lease commitments as of December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ------------
<S> <C> <C>
1998......................................................................... $ 486,795 $ 1,057,576
1999......................................................................... 219,771 941,647
2000......................................................................... 8,722 768,101
2001......................................................................... -- 744,174
2002......................................................................... -- 769,176
Thereafter (laboratory and office space to 2005)............................. -- 2,022,948
----------- ------------
Total minimum lease payments................................................. 715,288 $ 6,303,622
------------
------------
Less--Amount representing interest........................................... (56,156)
-----------
Total obligations under capital leases....................................... 659,132
Less--Current installments of obligations under capital leases............... (441,435)
-----------
Obligation under capital leases, net of current installments................. $ 217,697
-----------
-----------
</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 ten-year lease on this
facility currently covers 59,000 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
was only one financing under this arrangement for approximately $214,000. The
Company did not renew this leasing facility.
F-10
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 1997. 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 $446,000.
8. RELATED PARTY TRANSACTIONS:
The Company paid fees for consulting services to a member of the Board of
Directors. These fees are included in expenses and total approximately $42,000,
$36,000, and $24,000 in 1995, 1996 and 1997, respectively. In addition, the
Company recognized rent expense totaling $167,000, $414,000, and $535,000 for
1995, 1996 and 1997, 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.
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, 1997, the Company had 10,345,616 shares of
Common Stock outstanding.
F-11
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY: (CONTINUED)
WARRANTS. At December 31, 1997, there were warrants outstanding for the
purchase of an aggregate of 291,438 shares 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>
1995 1996 1997
---------------------- ---------------------- ----------------------
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.......... 321,646 $ 1.25-5.50 486,310 $ 1.25-5.50 423,251 $ 1.25-5.50
Granted................................. 164,664 $ 5.00 -- --
Exercised............................... -- 63,059 $ 1.25-4.30 131,813 $ 1.25-4.30
--------- --------- ---------
Outstanding, end of year................ 486,310 $ 1.25-5.50 423,251 $ 1.25-5.50 291,438 $ 1.25-5.50
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. STOCK OPTION PLAN:
The Company has adopted two stock option plans which provide for the
issuance of options to employees, directors and independent contractors of the
Company. These options vest over one to five years, expire ten years after
issuance and have an exercise price equal to or greater than the stock's fair
market value on the date of grant. During 1997 the shareholders of the Company
approved the addition of 300,000 shares to the 1992 Option Plan and the creation
of the 1997 Non-Employee Director Stock Option Plan for which 100,000 shares
were allocated.
A summary of the status of the plans is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------- -------------------------
WTD-AVERAGE WTD-AVERAGE WTD-AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.......... 706,994 $ .67 982,344 $ 1.10 1,053,544 $ 2.43
Granted, price equals fair value........ 403,250 1.66 149,000 10.83 342,750 8.02
Granted, price greater than fair
value................................. 115,000 10.00
Exercised............................... (69,187) .37 (36,700) .99 (112,748) 1.10
Cancellations........................... (58,713) .54 (41,100) 2.52 (92,859) 6.98
--------- ---------- ----------
Outstanding, end of year................ 982,344 $ 1.10 1,053,544 $ 2.43 1,305,487 $ 4.36
--------- ---------- ----------
--------- ---------- ----------
Exercisable, end of year................ 341,870 $ .68 520,091 $ 1.04 618,529 $ 1.45
--------- ---------- ----------
--------- ---------- ----------
</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 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 $410,000 over the actual vesting period of these options of three
F-12
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN: (CONTINUED)
to five years. During 1996 and 1997 the Company recognized approximately
$129,000 and $127,500, respectively, of compensation expense related to these
options.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized except for the December 1995 stock
option grant described above.Had compensation cost for these plans been
determined consistent with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------ ------------
<S> <C> <C> <C> <C>
Net Income..................................... As Reported $ 532,686 $ 2,363,384 $ 4,252,181
Proforma 518,486 2,244,765 3,815,054
Diluted Net Income per Share................... As Reported $ .08 $ .24 $ .38
Proforma .08 .23 .35
Weighted-average fair value of options
granted...................................... $ 1.57 $ 5.87 $ 5.87
</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 diluted 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 1995, 1996 and 1997: dividend yield of 0% for all
years; expected volatility of 0% for options granted while the Company was not a
public company, 73% for options granted in 1996 after the initial public
offering and 60% for 1997; risk-free interest rates of 5.6%, 6.4% and 6.2%,
respectively; and expected life of 6 years for all years.
This table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER NUMBER
RANGE OF OUTSTANDING AT WTD-AVERAGE EXERCISABLE WTD-AVERAGE
EXERCISE DECEMBER 31, WTD-AVERAGE EXERCISE AT DECEMBER EXERCISE
PRICES 1997 REMAINING LIFE PRICE 31, 1997 PRICE
- -------------- -------------- ------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ .35-.75 405,819 5.8 $ .66 386,829 $ .65
$ 1.00-1.75 358,868 7.7 1.59 200,750 1.62
$ 6.50-9.25 365,500 7.0 8.15 15,750 8.79
$ 9.56-12.63 175,300 7.0 10.67 15,200 12.06
--
-------------- ------ ------------- ------
$ .35-$12.63 1,305,487 6.9 $ 4.36 618,529 $ 1.45
-------------- -------------
-------------- -------------
</TABLE>
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 and beginning October 1,
F-13
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLAN: (CONTINUED)
1997 the Company is matching 25% of employee contributions up to a maximum of
12% of compensation. The Company's 1997 contribution to this plan was
approximately $32,000.
12. INCOME TAXES:
The Company has provided for income taxes (benefit) as follows:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Current:
Federal...................................................................... $ 312,293
State........................................................................ --
-------------
Total........................................................................ $ 312,293
Deferred:
Federal...................................................................... $ (1,749,465)
State........................................................................ --
-------------
Total........................................................................ (1,749,465)
Total income tax benefit....................................................... $ (1,437,172)
-------------
-------------
</TABLE>
No income tax benefit or expense was recorded in 1995 or 1996. The provision
for income taxes is different than the amount computed using the applicable
statutory federal income tax rate with the differences being summarized below:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rates...................................... 34% 34% 34%
State income taxes, less federal income tax effect............................ 4% 4% 1%
Other......................................................................... 6% 4% 3%
Adjustment due to change in valuation allowance............................... (44%) (42%) (89%)
--------- --------- ---------
Benefit for income taxes...................................................... 0% 0% (51%)
--------- --------- ---------
--------- --------- ---------
</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 at December 31, 1997 will be limited to
approximately $3.0 million, of which approximately $1.5 million, $700,000 and
$800,000 will be available in 1998, 1999 and subsequent years, respectively.
F-14
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES: (CONTINUED)
The tax effects of the temporary differences which gave rise to deferred tax
assets and liabilities at December 31, 1996 and 1997 were:
<TABLE>
<CAPTION>
1996 1997
------------- ------------
<S> <C> <C>
Net operating loss carryforward............................................ $ 2,498,410 $ 1,156,910
Depreciation and amortization.............................................. (24,797) (38,738)
Allowance for doubtful accounts............................................ 426,954 990,724
Alternative minimum tax carryforward....................................... 80,000 --
Other...................................................................... (73,363) 45,195
------------- ------------
Net deferred tax asset..................................................... $ 2,907,204 $ 2,154,091
Valuation allowance........................................................ (2,827,204) (324,626)
------------- ------------
Total net deferred tax asset............................................. $ 80,000 $ 1,829,465
------------- ------------
------------- ------------
</TABLE>
The valuation allowance for net deferred tax assets decreased by $2,502,578
in 1997 due to utilization of part of the net operating loss carryforward by the
Company's 1997 operations and due to management's reassessment of the Company's
ability to realize its remaining net deferred tax asset based upon its history
of operating results for 1997 and 1996 and projected operating results for 1998.
The valuation allowance for the net deferred tax asset previously was recorded
on the basis that significant uncertainty exists regarding the realizability of
such assets. The net deferred tax asset reflected for 1996 and 1995 was
attributable to the alternative minimum tax credit which was carried forward to
1997 and utilized.
13. NET INCOME PER SHARE:
A summary of the components of Net Income per Share and the impact of
dilutive securities is presented below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------------- --------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
NET AVERAGE PER SHARE NET AVERAGE PER SHARE NET AVERAGE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES
--------- --------- ----------- --------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income Per
Share--Basic............. $ 532,686 6,156,145 $ 0.09 $2,363,384 8,731,369 $ 0.27 $4,252,181 10,203,081
Effect of Dilutive
Securities:
Stock Options............ 552,635 820,398 692,779
Warrants................. 52,677 279,779 156,680
Net Income Per Share--
Assuming Dilution........ $ 532,686 6,761,457 $ 0.08 $2,363,384 9,831,546 $ 0.24 $4,252,181 11,052,540
<CAPTION>
PER SHARE
AMOUNT
-----------
<S> <C>
Net Income Per
Share--Basic............. $ 0.42
Effect of Dilutive
Securities:
Stock Options............
Warrants.................
Net Income Per Share--
Assuming Dilution........ $ 0.38
</TABLE>
Stock options and warrants to purchase shares of common stock at exercise
prices greater than the average market price of the common stock were
outstanding during each of the periods presented. Such options and warrants were
not included in the computation of Net Income Per Share--Assuming Dilution
because the impact would be antidilutive. Potential shares to be purchased under
antidilutive stock options totaled 0, 74,150 and 367,000 for 1995, 1996 and
1997, respectively. Potential shares to be purchased under antidilutive warrants
totaled 400,710, 0, and 0 for 1995, 1996 and 1997, respectively.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UROCOR, INC.
(Registrant)
By: /s/ WILLIAM A. HAGSTROM
-----------------------------------
William A. Hagstrom, CHAIRMAN OF
THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Dated: March 30, 1998.
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 30, 1998
(William A. Hagstrom) (Principal Executive
Officer)
Senior Vice President,
/s/ SOCRATES H. CHOUMBAKOS Corporate Planning &
- ----------------------------------- Development and March 30, 1998
(Socrates H. Choumbakos) Secretary
/s/ MICHAEL N. MCDONALD Chief Financial Officer
- ----------------------------------- and Treasurer (Principal March 30, 1998
(Michael N. McDonald) Financial Officer)
/s/ AARON BEAM, JR.
- ----------------------------------- Director March 30, 1998
(Aaron Beam, Jr.)
/s/ PAUL A. BROWN, M.D.
- ----------------------------------- Director March 30, 1998
(Paul A. Brown, M.D.)
/s/ HERBERT J. CONRAD
- ----------------------------------- Director March 30, 1998
(Herbert J. Conrad)
/s/ MICHAEL E. HERBERT
- ----------------------------------- Director March 30, 1998
(Michael E. Herbert)
/s/ THOMAS C. RAMEY
- ----------------------------------- Director March 30, 1998
(Thomas C. Ramey)
/s/ LOUIS M. SHERWOOD, M.D.
- ----------------------------------- Director March 30, 1998
(Louis M. Sherwood, M.D.)
<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 1997 Annual Report to
Shareholders on Form 10-K and have issued our report thereon dated January 28,
1998. 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, 1997, 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 28, 1998
S-1
<PAGE>
SCHEDULE II
UROCOR, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
CHARGE TO CHARGE TO
BEGINNING COST AND OTHER ENDING
DESCRIPTION BALANCE EXPENSE ACCOUNTS DEDUCTION(1) BALANCE
- --------------------------------------------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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, 1996:
Allowance for Doubtful Accounts............ 982,046 1,296,649 -- (1,155,133) 1,123,562
For the Year Ended December 31, 1997:
Allowance for Doubtful Accounts............ 1,123,562 2,257,666 -- (761,743) 2,619,485
</TABLE>
- --------------------------
(1) Represents write-offs of uncollectible accounts receivable against the
allowance for doubtful accounts.
S-2
<PAGE>
EXHIBIT 10.10
UROCOR, INC.
1997 MICP
- Target parameters to include total 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 10.15
PROMISSORY NOTE
For value received, Michael N. McDonald, an individual, ("Maker"), promises
to pay to the order of UroCor, Inc., a Delaware corporation, on or before
December 11, 1998, the principal sum of Twenty Thousand Dollars ($20,000.00),
together with interest thereon from the date hereof at the rates hereinafter
specified, payable as follows:
The unpaid principal amount from time to time outstanding under this Note
shall bear interest at the rate of seven and one-half percent (7.5%) per
annum. Maker has the right to draw an amount up to $20,000.00 from time to
time under this Note and shall repay the loan in full on or before December
11, 1998. Interest shall be computed on the basis of a 365 or 366 day year,
as applicable.
Payments of both principal and interest are to be made in the lawful money
of the United States of America.
Any sum not paid when due will bear interest at the rate per annum equal to
the Note rate plus five percent (5%), and such interest which has accrued will
be paid at the time of, and as a condition precedent to, the curing of any
default hereunder.
At the option of the holder, the unpaid balance of this Note, and all other
obligations of Maker to the holder, whether direct or indirect, absolute or
contingent, now existing or hereafter arising, shall become immediately due and
payable without notice or demand upon the occurrence or existence of any of the
following events or conditions: (a) any payment required by this Note or any
other note or obligation of Maker to the holder or to others is not made when
due; (b) the Maker's termination of employment with UroCor, Inc. or its
successors; or (c) Maker becomes insolvent or generally fails to pay, or admits
in writing its inability to pay, debts as they become due; or the Maker applies
for, consents to, or acquiesces in the appointment of a trustee, receiver or
other custodian for the Maker, or makes a general assignment for the benefit of
creditors; or in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for the Maker; or any
bankruptcy, reorganization, debt arrangement or other case or proceeding under
any bankruptcy or insolvency law is commenced in respect to the Maker.
The Maker shall have the right to prepay this Note in whole or in part at
any time and from time to time without premium or penalty, but with interest to
the date of payment on the amount prepaid. All payments under this Note shall be
applied first to any accrued interest and then to principal.
The Maker agrees that if, and as often as, this Note is placed in the hands
of an attorney for collection or to defend or enforce any of the holder's rights
hereunder, the Maker shall pay to the holder hereof its reasonable attorney's
fees, together with all court costs and other expenses incurred and paid by such
holder.
The Maker, endorsers, sureties, guarantors and all other persons who may
become liable for all or any part of this obligation severally waive presentment
for payment, protest and notice of nonpayment.
The failure of the holder hereof to exercise any of the remedies or options
set forth in this Note upon the occurrence of one or more events of default,
shall not constitute a waiver of the right to exercise the same or any other
remedy at any subsequent time in respect to the same or any other event of
default. The acceptance of the holder hereof of any payment which is less than
the total of all amounts due and payable at the time of such payment shall not
constitute a waiver of the right to exercise any of the foregoing remedies or
options at that time or any subsequent time, or nullify any prior exercise of
any such remedy or option, without the express consent of the holder hereof,
except as and to the extent otherwise provided by law.
The records of the holder of this Note shall be prima facie evidence of the
amount owing on this Note. This Note may be assigned by holder without the prior
consent of Maker.
This Note is made under and governed by the laws of the State of Oklahoma.
<PAGE>
IN WITNESS WHEREOF, the undersigned Maker has executed this instrument
effective the 11th day of December, 1997.
<TABLE>
<S> <C> <C>
"Maker":
/s/ MICHAEL N. MCDONALD
-----------------------------------------
Michael N. McDonald
</TABLE>
<PAGE>
EXHIBIT 10.16
PROMISSORY NOTE
For value received, Lou Carmichael, an individual, ("Maker"), promises to
pay to the order of UroCor, Inc., a Delaware corporation, on or before May 29,
1998, the principal sum of Thirteen Thousand, Three Hundred and Fifty Dollars
($13,350.00), together with interest thereon from the date hereof at the rates
hereinafter specified, payable as follows:
The unpaid principal amount from time to time outstanding under this Note
shall bear interest at the rate of seven and one-half percent (7.5%) per
annum. Maker has the right to draw an amount up to $13,350 from time to time
under this Note and shall repay the loan in full on or before May 29,1998.
Interest shall be computed on the basis of a 365 or 366 day year, as
applicable.
Payments of both principal and interest are to be made in the lawful money
of the United States of America.
Any sum not paid when due will bear interest at the rate per annum equal to
the Note rate plus five percent (5%), and such interest which has accrued will
be paid at the time of, and as a condition precedent to, the curing of any
default hereunder.
At the option of the holder, the unpaid balance of this Note, and all other
obligations of Maker to the holder, whether direct or indirect, absolute or
contingent, now existing or hereafter arising, shall become immediately due and
payable without notice or demand upon the occurrence or existence of any of the
following events or conditions: (a) any payment required by this Note or any
other note or obligation of Maker to the holder or to others is not made when
due; (b) the Maker's termination of employment with UroCor, Inc. or its
successors; or (c) Maker becomes insolvent or generally fails to pay, or admits
in writing its inability to pay, debts as they become due; or the Maker applies
for, consents to, or acquiesces in the appointment of a trustee, receiver or
other custodian for the Maker, or makes a general assignment for the benefit of
creditors; or in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for the Maker; or any
bankruptcy, reorganization, debt arrangement or other case or proceeding under
any bankruptcy or insolvency law is commenced in respect to the Maker.
The Maker shall have the right to prepay this Note in whole or in part at
any time and from time to time without premium or penalty, but with interest to
the date of payment on the amount prepaid. All payments under this Note shall be
applied first to any accrued interest and then to principal.
The Maker agrees that if, and as often as, this Note is placed in the hands
of an attorney for collection or to defend or enforce any of the holder's rights
hereunder, the Maker shall pay to the holder hereof its reasonable attorney's
fees, together with all court costs and other expenses incurred and paid by such
holder.
The Maker, endorsers, sureties, guarantors and all other persons who may
become liable for all or any part of this obligation severally waive presentment
for payment, protest and notice of nonpayment.
The failure of the holder hereof to exercise any of the remedies or options
set forth in this Note upon the occurrence of one or more events of default,
shall not constitute a waiver of the right to exercise the same or any other
remedy at any subsequent time in respect to the same or any other event of
default. The acceptance of the holder hereof of any payment which is less than
the total of all amounts due and payable at the time of such payment shall not
constitute a waiver of the right to exercise any of the foregoing remedies or
options at that time or any subsequent time, or nullify any prior exercise of
any such remedy or option, without the express consent of the holder hereof,
except as and to the extent otherwise provided by law.
The records of the holder of this Note shall be prima facie evidence of the
amount owing on this Note. This Note may be assigned by holder without the prior
consent of Maker.
This Note is made under and governed by the laws of the State of Oklahoma.
<PAGE>
IN WITNESS WHEREOF, the undersigned Maker has executed this instrument
effective the 30th day of June, 1997.
<TABLE>
<S> <C> <C>
"Maker":
/s/ LOU RYE CARMICHAEL
-----------------------------------------
Lou Rye Carmichael
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated January 28, 1998, included on pages F-2 and S-1 of the 1997
Annual Report to Shareholders on Form 10-K of UroCor, Inc., into the previously
filed Registration Statement on Form S-8 (File No. 333-16075) of UroCor, Inc.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
January 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET FOR DECEMBER 31, 1997 AND THE STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,896,033
<SECURITIES> 16,697,067
<RECEIVABLES> 16,160,901
<ALLOWANCES> 2,619,485
<INVENTORY> 497,639
<CURRENT-ASSETS> 40,868,294
<PP&E> 13,090,464
<DEPRECIATION> 4,079,882
<TOTAL-ASSETS> 54,452,119
<CURRENT-LIABILITIES> 3,479,318
<BONDS> 0
0
0
<COMMON> 103,456
<OTHER-SE> 50,651,648
<TOTAL-LIABILITY-AND-EQUITY> 54,452,119
<SALES> 0
<TOTAL-REVENUES> 32,951,514
<CGS> 0
<TOTAL-COSTS> 12,574,164
<OTHER-EXPENSES> 16,779,577
<LOSS-PROVISION> 2,266,825
<INTEREST-EXPENSE> 155,942
<INCOME-PRETAX> 2,815,009
<INCOME-TAX> (1,437,172)
<INCOME-CONTINUING> 4,252,181
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,252,181
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.38
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS FOR SEPTEMBER 30, JUNE 30 AND MARCH 31, 1997 AND THE
STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, THE
SIX MONTHS ENDED JUNE 30 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 12,062,710 10,642,034 17,241,057
<SECURITIES> 6,004,874 2,998,913 897,856
<RECEIVABLES> 14,553,553 14,273,250 11,845,573
<ALLOWANCES> 1,838,533 1,717,425 1,416,480
<INVENTORY> 462,073 496,118 703,195
<CURRENT-ASSETS> 33,062,762 28,735,013 30,722,448
<PP&E> 11,693,149 10,370,828 8,811,015
<DEPRECIATION> 3,821,779 3,480,521 3,147,757
<TOTAL-ASSETS> 50,850,860 50,413,647 50,166,358
<CURRENT-LIABILITIES> 2,300,574 2,358,821 2,683,914
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 102,009 101,711 101,540
<OTHER-SE> 48,151,887 47,560,950 46,866,941
<TOTAL-LIABILITY-AND-EQUITY> 50,850,860 50,413,647 50,166,358
<SALES> 0 0 0
<TOTAL-REVENUES> 23,658,800 15,873,272 8,078,565
<CGS> 0 0 0
<TOTAL-COSTS> 9,075,557 5,904,936 2,981,103
<OTHER-EXPENSES> 12,126,366 8,065,952 3,893,131
<LOSS-PROVISION> 1,226,239 835,614 406,283
<INTEREST-EXPENSE> 125,598 92,930 50,580
<INCOME-PRETAX> 2,363,222 1,841,414 1,201,084
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 2,363,222 1,841,414 1,201,084
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,363,222 1,841,414 1,201,084
<EPS-PRIMARY> 0.23 0.18 0.12
<EPS-DILUTED> 0.21 0.17 0.11
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS FOR DECEMBER 31, SEPTEMBER 30 AND JUNE 30, 1996 AND THE
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 30, THE NINE MONTHS
ENDED SEPTEMBER 30 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996
<CASH> 15,796,070 22,252,710 26,291,813
<SECURITIES> 12,968,163 4,002,594 3,965,421
<RECEIVABLES> 9,312,277 7,220,217 6,390,052
<ALLOWANCES> 1,123,562 782,149 865,772
<INVENTORY> 683,408 586,552 548,396
<CURRENT-ASSETS> 38,833,814 34,418,340 37,511,926
<PP&E> 7,656,299 5,743,254 5,201,774
<DEPRECIATION> 2,910,637 2,612,138 2,329,681
<TOTAL-ASSETS> 50,269,909 47,471,098 47,175,475
<CURRENT-LIABILITIES> 3,924,220 2,183,719 2,399,558
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 101,013 100,170 100,165
<OTHER-SE> 45,585,545 44,373,677 43,706,315
<TOTAL-LIABILITY-AND-EQUITY> 50,269,909 47,471,098 47,175,475
<SALES> 0 0 0
<TOTAL-REVENUES> 26,522,205 18,832,561 12,356,722
<CGS> 0 0 0
<TOTAL-COSTS> 9,965,639 7,104,132 4,528,202
<OTHER-EXPENSES> 13,888,430 10,079,476 6,680,891
<LOSS-PROVISION> 1,294,365 877,407 578,157
<INTEREST-EXPENSE> 225,531 170,782 109,889
<INCOME-PRETAX> 2,363,384 1,332,911 697,934
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 2,363,384 1,332,911 697,934
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,363,384 1,332,911 697,934
<EPS-PRIMARY> 0.27 0.16 0.09
<EPS-DILUTED> 0.24 0.14 0.08
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS FOR MARCH 31, 1996 AND DECEMBER 31, 1995 AND THE STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<CASH> 1,300,846 3,125,296
<SECURITIES> 0 0
<RECEIVABLES> 5,803,834 5,387,146
<ALLOWANCES> 822,044 982,046
<INVENTORY> 422,248 234,145
<CURRENT-ASSETS> 7,468,737 8,306,051
<PP&E> 4,785,451 4,258,777
<DEPRECIATION> 2,058,360 1,815,040
<TOTAL-ASSETS> 12,034,270 12,493,510
<CURRENT-LIABILITIES> 2,382,372 2,402,029
<BONDS> 0 0
0 0
62,862 62,862
<COMMON> 817 692
<OTHER-SE> 8,637,981 8,361,442
<TOTAL-LIABILITY-AND-EQUITY> 12,034,270 12,493,510
<SALES> 0 0
<TOTAL-REVENUES> 5,907,549 19,758,170
<CGS> 0 0
<TOTAL-COSTS> 2,138,043 7,353,676
<OTHER-EXPENSES> 3,226,344 10,755,835
<LOSS-PROVISION> 279,305 934,483
<INTEREST-EXPENSE> 56,506 290,473
<INCOME-PRETAX> 230,639 532,686
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 230,639 532,686
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 230,639 532,686
<EPS-PRIMARY> 0.04 0.09
<EPS-DILUTED> 0.03 0.08
</TABLE>
