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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-28328
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UROCOR, INC.
(Exact name of registrant as specified in its charter)
A DELAWARE IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 75-2117882
840 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
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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 15, 1999............................ $49,225,389
Number of shares of registrant's Common Stock outstanding as of March 15,
1999......................................................................... 10,498,692
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's proxy statement relating to the 1999 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................................................................................. 23
3. LEGAL PROCEEDINGS.......................................................................... 23
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 23
PART II.......................................................................................................... 24
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 24
6. SELECTED FINANCIAL DATA.................................................................... 26
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 27
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 34
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 34
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 34
PART III......................................................................................................... 35
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 35
11. EXECUTIVE COMPENSATION..................................................................... 35
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 35
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 35
PART IV.......................................................................................................... 35
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................... 35
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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--CAUTIONARY STATEMENTS", "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. SEE ALSO "BUSINESS--SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS".
ITEM 1. BUSINESS
OVERVIEW
UroCor, Inc. ("UroCor" or the "Company") markets a comprehensive range of
integrated products and services to assist in detecting, diagnosing, treating
and managing prostate cancer, bladder cancer, kidney stones and other complex
urologic disorders directly to urologists and managed care organizations. The
Company's primary focus is helping urologists improve patient care and outcomes
while reducing the total cost of managing these diseases.
The Company's UroDiagnostics Group provides comprehensive diagnostic
services to detect major urologic conditions, predict prognosis of the patient's
disease, monitor the patient's therapy and identify recurrence of the disease.
The Company's UroTherapeutics Group acquires marketing and co-promotion rights
to urologic pharmaceutical products and selected devices for use by urologists
and their patients. UroCor markets these services and products directly to
urologists and managed care organizations across the United States through the
Company's urology-focused sales force.
UroCor's UroSciences Group develops, evaluates and applies new diagnostic
products and technologies and facilitates the development and utilization of the
Company's disease databases and related information systems. The Company's
Disease Management Information Systems Group is developing proprietary urologic
disease databases and disease management models directed at improving the
diagnosis and treatment of patients. This Group developed and manages
LithoSavant, a proprietary information system and national database, as well as
a proprietary Internet-based wide area network that links the Company to many of
its clients.
UroCor was incorporated in Delaware in 1988 as the successor to a Texas
corporation that was incorporated in 1985.
UROLOGY MARKET
UroCor serves the segment of the United States urology market consisting of
approximately 7,500 office-based urologists, including those affiliated with
managed care organizations. These urologists diagnose and treat patients for
prostate cancer, bladder cancer, kidney stone disease, incontinence and other
complex urologic diseases. Their patients have generally been referred to them
by other physicians.
The urologist often serves as the primary diagnostician, oncologist and
surgeon, when surgery is required, for the treatment of prostate cancer, bladder
cancer and many other conditions. 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, most urologists are still served
primarily by local hospitals, pathology groups and many other companies that do
not focus on urologic disease or the urologist's practice.
UROCOR--OVERVIEW OF MAJOR PRODUCTS AND SERVICES
The table on the following two pages sets forth the Company's principal
diagnostic, therapeutic and information products and services in terms of
current offerings, expected 1999 offerings and offerings in-process of research
and new product development by UroCor in the urology market. The table is also
segregated by urologic disease to illustrate the Company's disease management
strategy:
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UROCOR--OVERVIEW OF MAJOR PRODUCTS AND SERVICES
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PRODUCT CATEGORY PROSTATE
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DIAGNOSTIC SERVICES
These services assist clinicians in SERUM--TOTAL PSA; COMPLEXED PSA; FREE/TOTAL
diagnosing, selecting appropriate therapies, RATIO
and managing their patients with urologic Measurement of serum PSA levels enable
diseases. clinicians to detect initial disease and
The benefits that UroCor provides are: monitor disease recurrence. UroCor offers a
- - Specialization in detection and diagnosis broad range of PSA and serum testing.
of urologic diseases. ANATOMIC PATHOLOGY--PROSTATE BIOPSY
- - Large, specialized uropathology group with UroCor's board-certified pathologists offer
significant cumulative experience in these clinicians increased confidence in diagnosis.
diseases. UROSCORE--STAGING ALGORITHM
- - Broad range of advanced technologies and An advanced diagnostic algorithm which allows
capabilities to assist in diagnosis and clinicians to better understand the stage of
prognosis. a patient's disease for selecting appropriate
treatment alternatives.
DNA PLOIDY ANALYSIS
UroCor's capability and experience with cell
DNA content measurements aids in predicting
the aggressiveness of disease.
THE COMPANY IS RESEARCHING AND DEVELOPING
ADDITIONAL DIAGNOSTIC/PROGNOSTIC CAPABILITIES
(I)
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THERAPEUTIC PRODUCTS
Therapeutics generally targeted to the BRACHYTHERAPY--RADIATION SEED IMPLANTS (L)
disease states for which UroCor has UroCor has signed an exclusive agreement to
complementary diagnostic services and market Iodine-125 implants which are used in
capabilities. the treatment of early, localized prostate
Therapeutic products in disease states cancer (awaiting FDA approval).
compatible with UroCor's marketing, ZENECA CO-PROMOTION
information services and disease management UroCor currently co-promotes Zeneca's
approach. hormonal therapy products for prostate cancer
Expect to market with unique service and (Casodex-Registered Trademark- and
convenience enhancements and information Zoladex-Registered Trademark-)
resources. THE COMPANY IS SEEKING ADDITIONAL THERAPEUTIC
PRODUCTS THROUGH ACQUISITION, MARKETING,
LICENSING OR CO-PROMOTION ARRANGEMENTS.
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INFORMATION SERVICES
Account access and diagnostic reporting via INTERNET REPORT DELIVERY SYSTEM
proprietary Internet-based network, marketed TAILORED PATIENT EDUCATION MATERIAL
as Internet Report Delivery System or IRDS. Patient diagnosis-specific materials,
Advanced information reporting and data available to the urologist with the
capabilities. diagnostic report via the Internet, fax or
Managed disease databases and disease models. mail, to help educate patients regarding
their disease.
PROSTATE DISEASE DATA BASE
The Company believes it maintains the most
comprehensive diagnostic prostate data base
with over 120,000 cases.
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(L)--Expected 1999 launch; (I)--In-process of research and new product
development
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BLADDER KIDNEY/INCONTINENCE
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CYTOLOGIC PATHOLOGY KIDNEY STONE ANALYSIS
UroCor's pathologists have extensive UroCor uses advanced systems to analyze the
experience in the diagnosis of bladder composition of stones, which is used by
cancers. Such expertise is applied to this urologists to direct treatment.
difficult diagnostic area which detects and KIDNEY STONE DIAGNOSTIC RISK ASSESSMENT
analyzes cancer cells in a urine specimen. A comprehensive evaluation of the underlying
MICROHEMATURIA causes of stone formation, which may indicate
A product developed to help clinicians the likelihood of a recurrence.
determine whether the source of trace of GENERAL SERUM CHEMISTRIES
blood in the urine originated from the kidney Serum testing capabilities that are helpful
or bladder. in understanding the patients' general health
DD23 MARKER ANALYSIS or overview of a particular disease.
A proprietary marker used in conjunction with THE COMPANY IS RESEARCHING AND DEVELOPING
cytology which helps in the detection of ADDITIONAL DIAGNOSTIC/PROGNOSTIC CAPABILITIES
bladder cancer. (I)
P53 MOLECULAR TESTING
A proprietary test utilized to detect gene
mutations which may predict cancers that are
more aggressive and may result in early
recurrence.
THE COMPANY IS RESEARCHING AND DEVELOPING
ADDITIONAL DIAGNOSTIC/PROGNOSTIC CAPABILITIES
(I)
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PACIS-REGISTERED TRADEMARK---BCG (L) PERSIST-REGISTERED TRADEMARK- TREATMENT
UroCor has exclusive U.S. marketing rights SYSTEM
for PACIS BCG therapy for certain types of An FDA-approved incontinence treatment system
bladder cancer (awaiting FDA approval). to help patients manage incontinence.
THE COMPANY IS SEEKING ADDITIONAL THERAPEUTIC [UroCor's initial entry into Incontinence]
PRODUCTS THROUGH ACQUISITION, MARKETING, THE COMPANY IS SEEKING ADDITIONAL THERAPEUTIC
LICENSING OR CO-PROMOTION ARRANGEMENTS. PRODUCTS THROUGH ACQUISITION, MARKETING,
LICENSING OR CO-PROMOTION ARRANGEMENTS.
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INTERNET REPORT DELIVERY SYSTEM INTERNET REPORT DELIVERY SYSTEM
TAILORED PATIENT EDUCATION MATERIAL (L) PATIENT SPECIFIC TREATMENT PLANS
The Company is developing patient diagnosis A specific patient treatment plan based on
specific materials to be delivered to the the diagnostic workup of the patient
urologist with the diagnostic report via the delivered in conjunction with the diagnostic
Internet, fax or mail, to help educate report in kidney stones management.
patients regarding their disease. LITHOSAVANT
BLADDER DISEASE DATA BASE (L) A proprietary information system and national
The Company is developing a comprehensive data base to help direct the treatment and
patient database to assess specific cases in tracking of stone disease and outcomes.
comparison to national trends and diagnostic
outcomes.
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DISEASE MANAGEMENT BUSINESS
DIAGNOSTIC SERVICES
The UroDiagnostics Group, also known in the urology market as UroCor Labs,
provides to office-based urologists the comprehensive diagnostic services listed
in the previous table to detect and diagnose certain major urologic diseases,
make a prognosis of the patient's disease, monitor the patient's therapy and
identify recurrence of the disease. The UroDiagnostics Group generated
approximately 85% of the Company's 1998 revenues.
The Company emphasizes enhanced service, including the delivery 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 home office-based regional customer service representatives and
field-based client relations representatives, who are responsible for handling
inquiries from referring physicians and providing support to the Company's sales
force.
PROSTATE CANCER
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 products are used in detection of the disease to improve the
urologist's ability to identify true positive cancer patients. In addition to
its Total PSA product, the Company offers Complexed PSA and Free/Total ratio,
which are used for further accuracy in the presence of a negative first biopsy
and may increase the urologist's ability to differentiate prostate cancer from
benign disease.
The current standard for diagnosis of the disease after the screening stage
is the prostate biopsy. The Company's sextant biopsy product is a tool intended
to increase the probability 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 and severity of the disease.
After detection 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 products.
BLADDER CANCER
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 disease 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. UroCor's bladder cellular analysis
incorporates a multi-modality approach that the Company believes provides
increased levels of analysis and corresponding improvements in accuracy of test
results compared to standard cellular analysis. The Company's complete bladder
cancer detection program combines the information from microscopic examinations
of a patient's specimen combined, when requested, with two
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different techniques, an analysis of the DNA in cell nuclei and the use of one
or more specific biomarkers, to assist in the pathologist's assessment for the
presence of cancer.
In September 1998, UroCor introduced a proprietary molecular diagnostics
test for detecting mutations in the p-53 gene, which studies have shown may
predict that the patient has an aggressive cancer. Presence of such mutations
may warrant a more aggressive treatment strategy for patients with such
mutations. UroCor can perform its p-53 determination using a urine specimen from
a patient with bladder cancer, while existing methods for determining the status
of a patient's p-53 gene must utilize a bladder biopsy obtained in a hospital
procedure. The UroCor assay may be performed on the same urine specimen on which
it performs its cellular analysis processes for the initial detection of bladder
cancer or for recurrence of the cancer in patients successfully treated for the
disease.
An additional condition that may relate to a number of urinary tract
diseases and infections is microhematuria, or the presence of small amounts of
blood in the urine. 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 STONES
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 specimen and
serum specimen to different testing service providers. UroCor's kidney stone
management system offers a program in which the urologist delivers all specimens
to UroCor and the Company provides an integrated analysis and report, as well as
patient treatment plan materials specific for each diagnosis.
In March 1998, UroCor introduced LithoSavant-TM-, an outcomes management
system for use by lithotripsy centers and urologists managing kidney stones
disease. This product was developed by UroCor in collaboration with the American
Lithotripsy Society and consists of specialized outcomes tracking and reporting
software used in conjunction with UroCor's national database on kidney stones
disease. LithoSavant is marketed directly to lithotripsy centers including some
of the national and regional chains which operate numerous centers across the
country.
THERAPEUTIC PRODUCTS MARKETING
The Company's 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 urologic pharmaceuticals
and related products and services used or prescribed by the urologist. The
Company intends to capitalize on its large urology customer base and the skills
of its urology-focused sales force to market such products and services to its
client base. The Company plans to differentiate its product and service
offerings from those of its competitors through ancillary services, which may
include on-line computerized entry, just-in-time inventory management for the
urologist's office, procedure trays to accompany selected therapeutic
interventions, data base access, reimbursement assistance and oncologist
consultation.
PROSTATE CANCER
ZENECA'S CASODEX AND ZOLADEX PRODUCTS. In October 1997, the Company entered
into a co-promotion agreement with Zeneca Pharmaceuticals, Inc. ("Zeneca")
pursuant to which the Company began co-promoting Casodex and Zolodex, Zeneca's
therapeutic products for advanced prostate cancer. The Company continued
co-promotion under the original agreement throughout 1998, and effective January
1,
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1999, UroCor and Zeneca replaced the original agreement with a revised
three-year co-promotion agreement, that is subject to termination under certain
circumstances. UroCor promotes these therapeutic products principally through
its relationships with its urologist clients. There are several other suppliers
of products approved for the same medical applications as the Zeneca products
and additional such products are being developed by others or already awaiting
United States Food and Drug Administration ("FDA") approval.
BRACHYTHERAPY: IODINE-125 RADIATION IMPLANTS. In September 1998, the
Company acquired worldwide marketing and distribution rights from Mills
BioPharmaceuticals, Inc. ("Mills") for a UroCor branded line of Iodine-125
("I-125") radiation implants (also referred to as "seeds") used in brachytherapy
for early stage prostate cancer. Brachytherapy is a form of radiation therapy in
which up to 80 to 100 seeds may be implanted in the prostate under ultrasound
guidance, increasingly performed as an out-patient procedure requiring no
overnight hospital stay. Some studies published to date on up to ten-year
follow-up of patients receiving this therapy have indicated success rates
comparable to radical prostatectomy (surgical removal of the prostate) with
lower reported incidence of serious incontinence and impotence side effects than
those resulting from surgery.
While this appears to make brachytherapy an increasingly popular treatment
option from the patient's point of view, there are still many unanswered
questions regarding which therapy is appropriate for a particular
patient/diagnosis. As brachytherapy may also be used in conjunction with
external beam radiation, hormonal therapy and other drug therapies, the
treatment selection decisions may be further complicated. The Company believes
its expertise in advanced diagnostic and prognostic technologies and its
capabilities and extensive information systems and resources in prostate cancer
cases may contribute to development of more rational processes to help patients
and their urologists determine appropriate therapy.
Mills is a private company founded in 1992 to commercialize its expertise in
adapting radioactive elements in a range of important medical applications.
Mills filed a Form 510(k) for approval by the FDA of its I-125 seed in December
1998. Based on discussions with Mills, the Company expects such approval during
1999 and to begin marketing shortly thereafter. There can be no assurance,
however, that such approval will be obtained.
Pursuant to its agreement with Mills, the Company plans to be the exclusive
marketing agent for the Mills' seeds in the United States and in all other
countries in which it secures distribution contracts with other parties for the
product. There are several suppliers to the United States market of I-125 seeds
and Palladium 103 radiation implants used for the same purpose.
BLADDER CANCER
PACIS BCG. In December 1994, the Company entered into an agreement with
BioChem Vaccines, Inc. ("BioChem"), a subsidiary of BioChem Pharma, Inc.,
granting the Company exclusive distribution rights in the United States for
PACIS BCG, a therapeutic product for treating certain types of superficial
bladder cancer. BCG is delivered directly into a patient's bladder by the
urologist using a catheter, generally in an office-based procedure. The current
BCG treatment procedure includes an initial series of six such doses over a
six-week period, and some 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 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 will be completed in 1999. There can be
no assurance, however, that such approval will be obtained. The Company has the
right to terminate the agreement at any time prior to FDA approval of the
product. In the event the FDA approves marketing of the BCG
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product in the United States, the Company's ability to maintain its exclusive
distribution rights is conditioned upon meeting certain minimum sales
requirements. There are two other suppliers of FDA approved BCG products in the
United States and numerous alternative drugs or surgery which may be used for
treating this disease.
INCONTINENCE
PERSIST TREATMENT SYSTEM. In August 1998, UroCor and DesChutes Medical
Products, Inc. ("DesChutes") entered into an agreement providing for UroCor to
market DesChutes' Persist Treatment System for incontinence. This FDA-approved
treatment system can be used by urologists and their patients in a program of
physical conditioning and bio-feedback of muscle groups employed to help rebuild
and strengthen pelvic floor muscles. According to a study published in the
Journal of the American Medical Association (JAMA) in December 1998, this type
of therapy appears to be more effective than drugs or surgery alone and is
preferred by patients experienced in alternative treatments. In addition,
physical conditioning muscle rehabilitation therapy of the type in which Persist
may be used can also be combined with drug therapy or surgery to improve their
effectiveness.
The National Institute of Health and the United States Department of Health
have indicated that treatment modalities of the type offered by Persist should
be the first line therapy for treatment of stress incontinence, urge
incontinence and incontinence which may result from radical prostatectomy
surgery. Patients with these conditions reportedly spend over $13 billion per
year as a result of their condition, most of it on dryness products that do
nothing to address the underlying causes. Studies report that most of the
patients who suffer from incontinence have not yet sought proper medical
assistance in controlling this condition. This type of therapy is currently
reimbursed by certain managed care plans and insurance companies but is not
currently reimbursed by Medicare.
Persist's design helps patients concentrate their efforts on the appropriate
muscles and can relate physical progress to improved performance in bladder
control. The Company initiated a pilot marketing of Persist in selected
territories across the United States late in 1998 and intends to begin a phased
national roll-out some time during the second quarter of 1999. Persist is a new
product in a relatively new category of therapies for incontinence, and there
remain many unresolved issues related to marketing, sales and distribution of
the product which may affect future sales results. There also is a broad range
of alternative products, drugs and surgery for treating incontinence and
additional competing drugs and devices in development or awaiting FDA approval.
In addition to the products and agreements noted above, 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.
SALES AND MARKETING
The Company presently markets its diagnostic services and therapeutic
products principally 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 to urologists, including
representatives specialized in marketing to national accounts and managed care
organizations. In early 1998, the Company completed the expansion and
reorganization of its sales force. The 50% increase in the size of the sales
force brought to 65 the number of sales representatives deployed across the
United States. The Company believes it has one of the largest specialized sales
forces focused solely on the urology market.
The Company is primarily focusing its sales and marketing resources on
increasing penetration and utilization of its products in urologists offices and
adding products and services to its current offerings, while maintaining and
selectively expanding its client base. The Company also intends to expand its
wide area network link with its client base to enhance communication between the
Company and its customers.
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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 and networks forming to specialize in urology.
DIAGNOSTIC PRODUCT AND TECHNOLOGY DEVELOPMENT
The Company's UroSciences Group combines access to external resources at
leading 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.
UroCor's collaboration with a biotechnology company led to development of
its proprietary molecular p-53 gene mutation assay for bladder cancer. The
Company is developing computer assisted imaging technology, known as
quantitative nuclear grading, which it has used to measure the degree of
disorganization of genetic material within cancer cell nuclei and to determine
tumor aggressiveness and disease prognosis in prostate cancer. This technology
is being evaluated along with other advanced technologies in collaboration with
Johns Hopkins Medical Institutions in a project directed at applying advanced
technologies to develop more powerful prognostic tools in prostate cancer. The
project is partially funded by a 1998 grant from the Department of Defense.
Over the past several years, the Company has also conducted a program of
gene discovery and applications work in differentiating among normal prostate
tissue, benign disease, prostate cancer and metastatic disease. The Company
believes some of the specific genetic anomalies discovered as a result of this
work may lead to advanced diagnostic and prognostic tools in prostate cancer.
Many of the genes and gene fragments (expressed sequence tags or ESTs),
discovered by UroCor scientists are covered by patent filings and recently
issued patents. The Company is conducting discussions with major diagnostic
companies regarding potential development of certain diagnostic applications of
its technologies.
The UroSciences Group has also helped create 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, a
portion of the tissue and cellular specimens received and reviewed by the
UroDiagnostics Group are stored for future reference and case information and
test results are entered into the Company's client patient database. UroCor is
working with urologists to obtain additional case information on therapy
selection decisions, patient follow-up, outcomes and claims to add to its
existing databases. The UroSciences Group's established working relationships
with leading academic centers and research institutions also provide surgical
pathology specimens and pathology and clinical information to be used for
collaborative research and product development. Using the Company's combined
specimen repository and patient databases, UroCor's scientists can evaluate new
technologies or techniques, facilitating the determination of the clinical
contribution that potential new products and services may represent.
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 and therapeutic product development outside the scope
of UroCor's service business. The Company is seeking potential partners for
further development of such products.
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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, academic
centers and managed care organizations and its existing information resources to
help improve the clinical management of patients with urologic disease.
INTERNET-BASED WIDE AREA NETWORK. The Company's Disease Management
Information Systems Group has developed a proprietary Internet-based wide area
network that provides for communication between UroCor and over 1,000 of its
physician clients. Through this network, which is marketed as UroCor's Internet
Report Delivery System, those clients receive the case reports on their
patients' 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 their test requests plus patient and billing information to the Company
in advance of a specimen.
DISEASE DATABASES AND CLINICAL DECISION SUPPORT SYSTEMS. The Company is
considering the further development of prostate, bladder and kidney stones
disease specific databases and certain outcomes tracking and related information
management tools. The Company's LithoSavant system for kidney stones management
is an example of the type of useful information product that can result from
this work. LithoSavant provides standardized data collection and outcomes
reporting and a comprehensive national database for lithotripsy and kidney
stones disease. The long-term goal of such databases is to provide urologists
with further tools to assess the relative effectiveness of different treatment
modalities and the ability to improve the management of their patients.
UROLOGY SUPPORT SERVICES BUSINESS--exited in 1998
The Company commenced operations of its Urology Support Services ("USS")
business in late 1997 intending to offer a broad range of business management
services to urologists. UroCor decided to exit the USS business at the end of
the third quarter of 1998 after determining that there was a need to focus
management and resources on the Company's core diagnostic and therapeutic
capabilities and opportunities. The Company initially sought to transfer USS to
an independently financed company, but determined by the end of the third
quarter that such a transaction could not be completed in a timely manner. The
Company recorded charges related to the USS exit totaling approximately $2.2
million that included estimated expenses for termination and transition of USS'
service contracts, related asset write-downs and severance and outplacement
costs for USS employees. Total operating losses for USS, excluding the USS exit
costs, for 1998 were approximately $1.1 million.
COMPETITION
The market for providing urologists and managed care organizations with
integrated diagnostic, therapeutic and information services is still emerging.
The Company is not aware of any other company in urology that currently is
providing the comprehensive approach pursued by the Company.
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-based pathology services that compete for the cellular
and tissue diagnostic services offered by the Company. Other hospital
laboratories, specialty laboratories and local, regional and national general
reference laboratories provide some of the serum and other testing provided by
the Company. The main competitive advantage of local and 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 covering all
their diagnostic testing needs in one agreement. Other companies that already
market diagnostic products and medical
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supplies in other fields have begun marketing systems and kits for performing
certain diagnostic 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 specialized
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 and many pharmaceutical companies as well as
other producers and distributors of medical products for the acquisition of new
technologies and products of potential importance to urologists. The Company
believes its own product, technology and business development capabilities
together with its expertise in urologic 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
urologists as well as many other therapeutic products currently compete with or
will compete with the Zeneca drugs being co-promoted by UroCor, the Company's
distribution of the Persist Treatment System for incontinence and the Company's
anticipated I-125 radiation implants for prostate cancer and PACIS BCG for
bladder cancer. 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 urologic drugs and devices. Because of its
existing relationships with urologists and its specialized sales force, the
Company believes that it has the ability to compete in this market.
Information systems companies, disease management companies and others may
provide services and software products that will compete with the Company's
current and proposed products and services. In addition, other companies,
academic institutions and consortia are building regional or national databases
focused on improving clinical and economic outcomes which may compete with the
Company's applications of its urologic disease databases and related resources.
Many of these competitors 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, consistency and depth of the underlying
clinical diagnosis and outcomes data, 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 urologic diseases.
Many of the Company's competitors are significantly larger and have
significantly greater financial, technical and administrative resources than the
Company. Many such competitors may also have long-established relationships with
the Company's current and prospective customers and with greater numbers of
managed care organizations.
GOVERNMENT REGULATION
The health care industry in the United States is highly regulated, and the
diagnostic service segment, which includes the Company's UroDiagnostics Group,
is no exception. The Company's diagnostic operations currently are not regulated
by the FDA. While the FDA now indicates that it does not plan to regulate assays
developed by laboratories for in-house use, the FDA in the past has considered
drafting guidelines for regulation of such assays. If in the future the FDA were
to issue guidelines for the clinical laboratory market sector, such guidelines
might require the Company to meet certain FDA requirements for the Company's
in-house assays. The FDA currently regulates some of the tests and systems
purchased by the Company from third parties and used in the Company's
diagnostics business. The manufacturers of such products are responsible for
compliance with the approval and marketing regulations of the FDA. If the
UroSciences Group should decide to market any of its diagnostic technology as
test kits to be used by third parties, such test kits would require FDA
approval. The Company performs internal validation
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procedures and selected external clinical evaluations 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. The Company generally has no control and
minimal, if any, input on those activities.
The Company's business also is subject to a variety of governmental
regulations at the federal, state and local levels. The Company's clinical
laboratory is certified under the federal Clinical Laboratory Improvement Act of
1976, as amended in 1988 ("CLIA"), and participates in the federal Medicare
program and certain state Medicaid programs. The Company also is licensed under
the clinical laboratory licensure laws of Oklahoma, where the Company's clinical
laboratory is located. In addition, the laboratory is accredited by the College
of American Pathology. 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. Limited "safe harbor" regulations define a narrow scope of
practices that will be exempted from federal prosecution or other enforcement
action under the Federal Anti-Kickback Law and fail to exempt a wide range of
activities frequently engaged in among hospitals and physicians and other third
parties. Activities that fall outside the safe harbor rules are not necessarily
illegal, although they may be subject to increased likelihood of scrutiny,
investigation or prosecution. The Anti-Fraud and Abuse Amendments contain both
criminal and civil sanctions, which are enforced by the Office of Inspector
General ("OIG") of DHHS and the United States Department of Justice (the "DOJ").
Civil sanctions may include, among others, exclusion from participation in the
Medicare and state health care programs and civil money penalties.
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
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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. HIPAA also created a federal crime of health care fraud, which
applies to anyone who knowingly and willfully executes, or attempts to execute,
a scheme or artifice to defraud any health care benefit program, including any
public or private plan or contract, affecting commerce, under which any medical
benefit, item or service is provided to any individual. The Balanced Budget Act
of 1997 ("BBA") expanded the sanctions under the Federal Anti-Kickback Law to
include civil monetary penalties up to $50,000 for each prohibited act and up to
three times the total amount of remuneration offered, paid, solicited, or
received, without regard to whether a portion of such remuneration was offered,
paid, solicited, or received for a lawful purpose. The BBA also further expanded
anti-fraud funding, revised the resource-based relative value scale system, and
called for the government to trim the growth of federal spending on Medicare by
$115.1 billion and Medicaid by $13 billion over the subsequent five years.
There is ever-increasing scrutiny by federal and state law enforcement
authorities (including OIG and 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.
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. There can be no assurance that any additional safe harbor
regulations will be promulgated or that they will provide protection for any of
the Company's activities. Although the Company seeks to structure its practices
to comply with the Anti-Fraud and Abuse Amendments, no assurance can be given
regarding compliance in any particular factual situation.
Another federal provision, the physician self-referral and payment
prohibition (commonly referred to as the "Stark law"), 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. The Stark provisions
became effective January 1, 1992 for clinical laboratory services ("Stark I")
and January 1, 1995 for ten other designated health services ("Stark II"). Final
Stark I regulations became effective on August 14, 1995. Stark II proposed
regulations were published on January 9, 1998. Final Stark II regulations remain
in the preparation stages and might not be published for several years.
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.
The Stark provisions also include specific reporting requirements providing
that each entity furnishing covered items or services must provide the Secretary
of DHHS with certain information concerning its ownership, investment and
compensation arrangements. Reportable information includes the identification of
all physicians who have a financial relationship with the entity. Failure to
adhere to these reporting requirements may subject the entity to significant
civil monetary penalties.
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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
seeks to structure its practices to comply with applicable provisions of the
Stark law and similar state laws, 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.
In July 1998, the Company received a Civil Investigative Demand (the "CID")
from the DOJ concerning allegations that the Company may have submitted false
claims in connection with bills for services submitted to Medicare and other
federal insurance programs. The Company received a second CID from the DOJ in
March 1999 concerning allegations that the Company may have submitted false
claims for payments, submitted false statements in support of false claims, or
conspired to submit false claims to government officials in connection with
bills for services submitted to Medicare and other federal insurance programs
by, among other things, bundling tests, billing for medically unnecessary tests
and upcoding. The DOJ has given the Company no further information regarding the
allegations. The CIDs require the Company to produce certain documents to the
DOJ. The Company produced documents to the DOJ in response to the initial CID,
intends to produce documents to the DOJ in response to the second CID and
intends to cooperate fully with the DOJ with respect to this investigation.
Although the Company seeks to structure its practices to comply with all
applicable laws, no assurances may be given regarding the resolution of this
matter, and the Company is unable to predict its impact, if any, on the Company.
If the DOJ were to pursue and prevail on matters that may arise from this
investigation, any significant recoupment of funds or civil or criminal penalty
or exclusion from federal and state health care programs potentially resulting
from such proceedings would have a material adverse effect on the Company.
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 seeks to structure its practices
to comply with these laws, no assurance may be given with regard to such matters
and there can be no assurance that future interpretations of such laws will not
require structural or organizational modifications of the Company's existing
business.
In August 1998, the OIG released a revised second set of model compliance
plans for laboratories that are based largely on the corporate integrity
agreements negotiated with the laboratories which settled a number of government
enforcement actions against laboratories under Operation Restore Trust,
initiated in 1995. The OIG strongly recommended that laboratories adopt a form
of compliance plan based on the model plans. The Company recently reorganized
its compliance program to include components of the OIG's model compliance plan
as the Company deemed appropriate to the conduct of its business. One key aspect
of the corporate integrity agreements and the model compliance plan is an
emphasis on the responsibilities of laboratories to notify physicians that
Medicare covers only medically necessary services. Although these requirements
focus on chemistry tests, especially routine tests, rather than on anatomic
pathology services or the non-automated tests which make up the majority of the
Company's business, they
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could affect physician test ordering habits more broadly. The Company is unable
to predict whether or to what extent these developments may have an impact on
the utilization of the Company's services.
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 1996, 1997 and 1998, the Company received approximately 52%, 47% and 46%,
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 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. Such recent changes generally lowered otherwise
anticipated Medicare reimbursement rates 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 or otherwise not reasonable and
necessary for diagnosis or treatment. Formal coverage determinations are 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. Furthermore, Medicare and other
third-party payors have, on occasion, denied reimbursement when certain tests
are ordered for patients with certain diagnoses while approving reimbursement
when the same tests are ordered for patients with other diagnoses deemed
appropriate by the carrier. This practice recently has become more prevalent
with respect to Medicare. 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
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Company as a service provider could have a material adverse effect on the
Company's results of operations and financial condition.
In addition, if the Company is unable to become an approved participating
provider under certain managed care programs that cover a number of patients of
any particular physician, that physician, to simplify purchasing and billing,
may elect to use a competitor of UroCor that is approved by such managed care
organizations for all of his or her needs, regardless of whether other patients
are covered by Medicare or other third party payors.
INTELLECTUAL PROPERTY
The Company has entered into a variety of license and option agreements with
academic centers and biotechnology companies covering technologies it believes
may be of utility in the future in improving urologic 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
discoveries and inventions concerning new technologies, 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 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 or other relationships with
the Company. There can be no assurance that these agreements will provide
meaningful protection for any of the Company's trade secrets in the event of
unauthorized use or disclosure of such information.
The Company intends to seek copyright protection when appropriate for any
information systems products it may develop.
The Company has registered the service marks UROCOR-Registered Trademark-,
URODIAGNOSTICS-Registered Trademark-, UROSCIENCES-Registered Trademark- and
UROSCORE-Registered Trademark- with the United States Patent and Trademark
Office.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials, biological
specimens and wastes. Although the Company believes that it has complied in all
material respects with these laws, regulations and policies and has not been
required to take any action to correct any noncompliance, there can be no
assurance that the Company will not be required to incur significant costs to
comply with environmental and health and safety regulations in the future.
The Company's research and development activities involve the controlled use
of hazardous materials, including certain hazardous chemicals and infectious
biological specimens. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these 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, 1998, the Company had 310 full-time and 27 part-time
employees, of which 110 were employed in diagnostic services operations and
support, 123 in sales and marketing, 17 in scientific
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research and development, and 87 in general and administrative. At December 31,
1998, the Company employed, full time, 10 persons with M.D. degrees and 5
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
"--Cautionary Statements" and elsewhere in this Report, including, without
limitation, in conjunction with the forward-looking statements included in this
Report. All subsequent written and oral forward-looking statements attributable
to the Company, or persons on its behalf, are expressly qualified in their
entirety by the Cautionary Statements.
CAUTIONARY STATEMENTS
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 additional therapeutic
products and information 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 or information services businesses.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly and
annual operating results are affected by a wide variety of factors, many of
which are outside the Company's control, which have in the past and could in the
future materially and adversely affect revenue, operating expenses and income.
These factors include seasonality, the quantities and timing of specimens
received, competitive pricing pressures, reimbursement changes, availability and
cost of diagnostic supplies, availability and cost of logistic and delivery
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 Company relies principally upon Federal Express, UPS and
Airborne Express for inbound and outbound shipping of specimens and kits for its
diagnostics operations; any disruption in the availability of such logistics and
delivery services could have a material adverse effect on the Company's
operating results. The need for continued investment in research and development
and expansion of its product lines could limit the Company's ability to reduce
expenses quickly. As a result of these factors, the Company's operating results
may continue to fluctuate in the future.
UNCERTAINTIES RELATED TO GOVERNMENT REGULATION AND ENFORCEMENT. 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 various types of regulatory
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activity affect the Company's business by controlling its growth, restricting
licensure of the business entity or by controlling the reimbursement for
services provided. 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.
Existing federal laws governing federal health care programs, including
Medicare, as well as some state laws, regulate certain aspects of the
relationship between health care providers, including the Company, and their
referral sources, including physicians, hospitals and other facilities. The
Anti-Fraud and Abuse Amendment and the Stark law generally prohibit providers
and others from soliciting, offering, receiving or paying, directly or
indirectly, any remuneration in return for either making a referral for a
service or item and prohibit physicians, subject to certain exceptions, from
making such referrals to certain entities in which they have an investment
interest or with which they have a compensation arrangement. Violation of these
prohibitions is punishable by disallowance of submitted claims, civil monetary
penalties and criminal penalties and exclusion from the Medicare and other
federally funded programs. The federal government has expanded its investigative
and enforcement activities in these areas. The federal government also has
become more aggressive recently in examining billing by laboratories and other
health care providers, and in seeking repayments and even penalties based on how
the services were billed (e.g. the billing codes used), regardless of whether
carriers had furnished clear guidance on this subject.
In July 1998, the Company received a CID from the DOJ concerning allegations
that the Company may have submitted false claims in connection with bills for
services submitted to Medicare and other federal insurance programs. The Company
received a second CID from the DOJ in March 1999 concerning allegations that the
Company may have submitted false claims for payments, submitted false statements
in support of false claims, or conspired to submit false claims to government
officials in connection with bills for services submitted to Medicare and other
federal insurance programs by, among other things, bundling tests, billing for
medically unnecessary tests and upcoding. The DOJ has given the Company no
further information regarding the allegations. The CIDs require the Company to
produce certain documents to the DOJ. The Company produced documents to the DOJ
in response to the initial CID, intends to produce documents to the DOJ in
response to the second CID and intends to cooperate fully with the DOJ with
respect to this investigation. Although the Company seeks to structure its
practices to comply with all applicable laws, no assurances may be given
regarding the resolution of this matter, and the Company is unable to predict
its impact, if any, on the Company. If the DOJ were to pursue and prevail on
matters that may arise from this investigation, any significant recoupment of
funds or civil or criminal penalty or exclusion from federal and state health
care programs potentially resulting from such proceedings would have a material
adverse effect on the financial condition and results of operations of the
Company. In addition, any related regulatory announcements or actions with
respect to enforcement activities could have a negative impact on the Company's
stock price regardless of the ultimate outcome of the matters under
investigation.
The Company's diagnostic laboratory operations currently are required to be
certified or licensed under the federal Clinical Laboratory Improvement Act of
1976, as amended in 1988, the Medicare and Medicaid programs and various state
and local laws. In some instances, the Company is also subject to licensing or
regulation under federal and state laws relating to the handling and disposal of
medical specimens, infectious and hazardous waste and radioactive materials, as
well as to the safety and health of laboratory employees. The sanctions for
failure to comply with these regulations may include denial of the right to
conduct business, significant fines and criminal penalties. 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.
17
<PAGE>
While the Company currently knows of no plans that the FDA has to require
FDA approval of assays developed by laboratories for in-house use, the FDA has
in the past considered drafting guidelines for such regulation. If in the future
the FDA were to issue guidelines for the clinical laboratory market sector, such
guidelines might require the Company to meet certain FDA medical device approval
requirements for the Company's in-house assays. Such regulations, if enacted in
a way that affects the Company, would increase the cost of development and
approval of new products, slow their introduction to the market and could have a
material adverse effect on the Company's financial condition and results of
operations. Additionally, in a recent rule, the FDA stated that in some
circumstances involving in-house assays, laboratories will be required, upon
effectiveness of the rule, to indicate that the assay has not been cleared by
the FDA. There can be no assurance that such disclosure will not have an adverse
impact on reimbursement.
The FDA currently regulates a number of the products which the Company
purchases from third parties for use in its diagnostic services. The
manufacturers of such products are responsible for compliance with FDA
regulations relating to such products. There can be no assurance, however, that
action by the manufacturers or by the FDA would not impair the Company's ability
to obtain and offer certain services. The unavailability of certain services and
materials used in the Company's diagnostics business would have a material
adverse effect on the Company's financial condition and results of operations.
The FDA regulates products licensed or otherwise acquired from third parties
and distributed or marketed by the Company. The manufacturers of such products
are responsible for compliance with the approval and marketing regulations of
the FDA. The ability of such third parties to address their FDA regulatory
issues is outside the Company's control. There can be no assurance that the
failure of such third parties to address their FDA regulatory matters adequately
will not have a material adverse effect on the Company's financial condition and
results of operations.
Although the Company's existing and proposed information services products
currently are not subject to regulation by the FDA, the FDA could determine in
the future that the predictive applications 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.
UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT. 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. The Company routinely bills for direct reimbursement for both
medical services and products. As is common with all suppliers of medical
services and devices, there is a certain amount of variability with respect to
reimbursement among third party payor sources. The Persist Treatment System is a
new product introduction into the health care market. There can be no assurance
that the Persist Treatment System or any other new products the Company
currently has under development will be accepted for reimbursement by Medicare
or other third party payors. Such uncertainty makes the amount and timing of
Persist reimbursement difficult to predict, which potentially subjects the
Company to reimbursement risks with respect to accounts receivable. Furthermore,
Medicare and other third party payors have, on occasion, ceased reimbursement
when certain tests are ordered for patients with certain diagnoses while
maintaining reimbursement when those tests are ordered for other diagnoses
deemed appropriate by the carrier. This practice has recently become more
prevalent with respect to Medicare. Medicare may retroactively audit and review
its payments to the Company and may determine that certain payments for services
must be returned. In addition, if the Company is unable to become an approved
participating provider under certain managed care programs that cover a number
of patients of any particular physician, that physician, to simplify purchasing
and billing, may elect to use a competitor of UroCor that is approved by such
managed care organizations for all of his or her needs, regardless of
18
<PAGE>
whether other patients are covered by Medicare or other third party payors. The
loss of key urologists and their patients could have a material adverse affect
on the Company's financial condition and results of operations.
POTENTIAL HEALTH CARE REFORM. 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 BBA that effected numerous
changes to the Medicare and Medicaid programs that could affect health care
providers, including clinical laboratories. The 1997 act also revised the
resource-based relative value scale system that could affect health care
providers that offer physician pathology services. These 1997 changes and any
future changes in Medicare and other third-party payor reimbursement which may
result from health care reform or deficit reduction legislation will likely
continue the downward pressure on prices. A number of other legislative
proposals have been introduced in Congress and state legislatures in recent
years that would effect major reforms of the health care system and otherwise
reduce health care spending. Because of the uncertainties surrounding the
nature, timing and extent of any such reimbursement changes, audits and reform
initiatives, the Company is unable to predict the effects of any such matters on
the Company.
DEPENDENCE ON CERTAIN PRODUCT LINES. A significant portion of the Company's
revenue has been, and is expected to continue to be, dependent upon the
Company's prostate tissue analysis and bladder cellular analysis product lines.
Any negative event related to these product lines, such as increased
competition, pricing pressures, reimbursement changes and clinical or
technological obsolescence, would have a material and adverse effect on the
Company's financial condition and results of operations.
NO ASSURANCE OF 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 that the
Company will be able to identify new products, trends or opportunities, develop
and bring to market new products, respond effectively to new technological
changes or product announcements by others, develop or obtain access to advanced
materials and technologies or receive commercial acceptance for its products.
UNCERTAINTIES RELATED TO THE FDA APPROVAL OF THERAPEUTIC PRODUCTS. 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. As a result of an August
1998 FDA site visit and subsequent discussions between BioChem and the FDA,
BioChem has undertaken upgrading certain portions of its manufacturing process
and facility to meet FDA requirements. 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.
The Company also has a marketing agreement with Mills for a therapeutic
product used for early stage prostate cancer. Pursuant to the marketing
agreement, Mills is responsible for obtaining approvals from the FDA for
marketing the therapeutic product in the United States. In December 1998, Mills
filed a Form 510(k) with the FDA for approval. There can be no assurance that
approval will be obtained.
NO ASSURANCE OF SUCCESSFUL MARKETING ARRANGEMENTS FOR THERAPEUTIC
PRODUCTS. The Company conducts marketing activities for therapeutic products
through its UroTherapeutics Group. The Company currently
19
<PAGE>
has acquired distribution or co-promotion rights for five therapeutic products.
While the Company has experience marketing two of the therapeutic products,
there can be no assurance that the Company's future efforts will be successful.
UroCor's future therapeutics marketing efforts are dependent, in part, upon
acquiring, licensing and co-promoting additional pharmaceuticals from others.
Other companies, including those with substantially greater resources, are
competing with UroCor for the rights to such products. There can be no assurance
that UroCor will be able to acquire, license or co-promote additional
pharmaceuticals on acceptable terms, if at all. The failure to acquire, license,
co-promote or market commercially successful pharmaceuticals could have a
material adverse effect on the Company's financial condition and results of
operations. Furthermore, there can be no assurance that, once it has obtained
rights to a pharmaceutical product and committed to payment terms, UroCor will
be able to generate sales sufficient to create a profit or otherwise avoid a
loss on such product.
For the year ended December 31, 1998, the Company recorded revenue of
approximately $6.0 million under a co-promotion agreement with Zeneca. The
Company recognized revenue under this agreement based principally on the
attainment of mutually agreed upon sales goals. Effective January 1, 1999,
UroCor and Zeneca replaced the original agreement with a revised three-year
co-promotion agreement. Pursuant to the new agreement, UroCor will be
compensated based on completed sales calls with a potential bonus based on the
attainment of Zeneca's sales goals. Because of the difference in the criteria in
the original agreement and the current agreement for determining UroCor's
compensation, the Company does not believe that past results under the original
agreement will be indicative of future results, and the Company currently does
not anticipate that it will attain the same level of revenues under the current
agreement that it attained in 1998 under the original agreement. The current
agreement is subject to termination upon the occurrence of certain events or by
either party in its discretion giving the other party prior notice of 90 days of
termination without cause on or after September 30, 1999.
POTENTIAL THERAPEUTICS PRODUCT LIABILITY OR RECALL. As UroCor increases its
marketing of therapeutic products, it faces increasing exposure to product
liability claims in the event that the use of any of its therapeutic products is
alleged to have resulted in adverse effects. Such risks will exist even with
respect to those products that receive regulatory approval for commercial sale.
While UroCor has taken, and intends to continue to take, what it believes are
appropriate precautions, there can be no assurance that it will avoid
significant product liability exposure or product recalls. UroCor currently has
product liability insurance; however, there can be no assurance that the level
or breadth of any insurance coverage will be sufficient to cover potential
claims. There can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim or recall would not have a material adverse effect on the
Company's financial condition and results of operations.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE. Virtually all of the Company's
diagnostic services are rendered on a fee-for-service basis. Accordingly, the
Company assumes the financial risk related to collection, including potential
inability to collect accounts, long collection cycles for accounts receivable,
difficulties in gathering complete and accurate billing information and delays
attendant to reimbursement by third-party payors, such as governmental programs,
private insurance plans and managed care organizations. At times, the Company's
accounts receivable have increased at a rate greater than revenue growth and,
therefore, have affected the Company's cash flow from operations. In addition,
in 1998, the Company determined that due to oversights in certain billing
procedures the Company did not send invoices timely to certain patients,
primarily managed care patients, for certain co-pay, deductible and other
amounts relating principally to services rendered in 1998. In December 1998, the
Company commenced collection efforts for certain of these amounts. As a result
of the delay in sending such invoices, the Company may have difficulty in its
collection efforts. The Company has previously taken steps to implement systems
and processing changes intended to improve billing procedures and related
collection results, and, in response to the oversights determined in 1998, it is
undertaking additional initiatives to further improve claims efficiencies and
collection results. While the Company maintains what it believes to be an
adequate allowance for doubtful accounts, there can be no assurance that the
Company's ongoing assessment of
20
<PAGE>
accounts receivable will not result in the need for additional provision for
doubtful accounts. Such additional provision could have an adverse effect on the
Company's results of operations.
RISKS RELATED TO TERMINATION OF UROLOGY SUPPORT SERVICES BUSINESS. During
1998, the Company provided limited business management services, primarily
billing and collection services, to selected urologist clients, through the
Company's USS business. As a result of the Company's exit from this business as
of the end of the third quarter, the Company has incurred severance and other
expenses. The Company believes it accrued the estimable expenses associated with
terminating the existing service contracts and related exit activities. There
can be no assurance that additional expenses related to these activities, costs
due to unforeseen consequences of exiting the USS business or unexpected USS
business expenses will not occur in future periods. Such occurrences may have a
material adverse affect on the Company's results of operations.
RISKS ASSOCIATED WITH 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 or use in the future related to the clinical management of urologists'
patients. 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 may 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 ASSOCIATED WITH DEVELOPMENT OF DATABASES. The confidentiality of
patient medical records is subject to substantial regulation by the state and
federal governments. State and federal laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Legislation governing the dissemination and use of medical record information is
being proposed continually at both the state and federal levels. For example,
the 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 urology
disease information database and related treatment. The Company intends to
continue to monitor and review the interpretation and enactment of laws and
regulations which affect the Company's plans to develop and market its urology
disease information database. In addition, the American Medical Association (the
"AMA") has issued an opinion to the effect that a physician who does not obtain
a patient's consent to the disclosure of the patient's medical record
information violates the AMA's ethical standards. While the AMA's opinions are
not law, they may influence the willingness of physicians to obtain patient
consents or to disclose patient medical information to the Company and thus
could have a material adverse effect on the Company's plans to develop and
market its urology disease information database.
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 urologic diseases. There can be no assurance
that the Company will be able to maintain its existing contracts with managed
care
21
<PAGE>
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.
UNCERTAINTIES RELATED TO PATENTS AND PROPRIETARY RIGHTS. While UroCor's
success does not depend on its ability to obtain patents, there can be no
assurance that it can operate without infringing upon the proprietary rights of
others. UroCor has licenses or license rights to certain United States patent
and patent applications. On UroCor's own patent applications, there can be no
assurance that patents, United States or foreign, will be obtained, or that, if
issued or licensed, they will be enforceable or will provide substantial
protection from competition or be of commercial benefit, or that UroCor will
possess the financial resources necessary to enforce or defend any of its patent
rights. Federal court decisions establishing legal standards for determining the
validity and scope of patents in the field are in transition. There can be no
assurance that the historical legal standards surrounding questions of validity
and scope will continue to be applied or that current defenses as to issued
patents in the field will offer protection in the future. UroCor must also avoid
infringing patents issued to competitors and must maintain technology licenses
upon which certain of its current products are, or any future products under
development might be, based. Litigation, which could result in substantial cost
to the Company, may be necessary to enforce its patent and license rights or to
determine the scope and validity of proprietary rights of third parties. If any
of UroCor's products are found to infringe upon patents or other rights owned by
third parties, it could be required to obtain a license to continue to utilize
or market such products. There can be no assurance that licenses to such patent
rights would be made available to the Company on commercially reasonable terms,
it at all. If UroCor does not obtain such licenses, it could encounter delays in
marketing affected products or be precluded from marketing them at all.
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, regional and national pathology services,
hospital laboratories and 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.
Many companies, including large pharmaceutical firms with financial and
marketing resources and development capabilities substantially greater than
those of UroCor, are engaged in developing, marketing and selling therapeutic
products that compete with the drugs and devices offered or planned to be
offered by the Company. The selling prices of such products frequently decline
as competition increases. Further, other products now in use or under
development by others may be more effective than UroCor's current or future
products. The industry is characterized by rapid technological change, and new
or presently competing products may prevent the Company's products from gaining
sufficient market share to attain profitability. As a result of increasing
competition in marketing to urologists, the Company's ability to attract and
retain sales representatives and management may also affect its ability to
compete in the marketing of both diagnostic services and therapeutics. There can
be no assurance that the Company will be able to compete successfully in
marketing therapeutic products.
YEAR 2000 RISKS. The Company's initial assessment of its key computerized
information systems and related applications indicated that these systems and
applications are prepared to accommodate date-sensitive information relating to
the Year 2000 issue. There can be no assurance, however, that the complete
assessment, currently being completed by the Company, will not identify Year
2000 related
22
<PAGE>
systems problems that could require significant expenditures to address.
Additionally, the ability of third parties with whom the Company transacts
business to adequately address their Year 2000 issues is outside the Company's
control. The Company has an ongoing project to communicate with the third
parties with which it does business to coordinate Year 2000 compliance. There
can be no assurance that the failure of the Company or such third parties to
adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's financial condition and results of operations.
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 the
Company to seek additional resources. There is no assurance that the Company
would be able to obtain such financing on acceptable terms.
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. In June 1998, the Company amended its lease agreement to reflect the
Company's planned relocation to an adjacent building under construction. The
Company anticipates it will relocate to the new facility by mid-1999, occupying
approximately 102,000 square feet. The amended lease term expires in December
2013, subject to early termination provisions. The Company has rights of first
refusal to lease additional space in the rest of the 122,000 square foot
building as well as a purchase option on the building. 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.
23
<PAGE>
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 trades on The Nasdaq Stock
Market-Registered Trademark- under the symbol "UCOR". The table below sets forth
the high and low sales prices of the Common Stock each quarter of 1997 and 1998,
and the first quarter of 1999 through March 15, 1999, 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.
<TABLE>
<CAPTION>
1997 1998 1999
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 6 5/8 4 5/16
Second Quarter....................... 10 1/4 6 1/2 8 6 3/4 -- --
Third Quarter........................ 9 5/8 5 1/2 7 3/16 4 1/4 -- --
Fourth Quarter....................... 10 7/8 5 3/16 7 4 1/8 -- --
</TABLE>
- ------------------------
(1) Through March 15, 1999.
As of March 15, 1999, the last sales price per share of the Common Stock, as
reported by The Nasdaq Stock Market, was $4 7/8.
As of March 15, 1999, the Company's 10,498,692 shares of Common Stock
outstanding were held by 104 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 1998, the Company issued a total of 50,945 shares of Common Stock for
an aggregate consideration of $191,341 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 have been exempt from registration under Section
4(2) of the Securities Act of 1933, as amended.
24
<PAGE>
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.
From the effective date of the registration statement through December 31,
1998, 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............ 5,792,841
Purchases of real estate........................................ --
Acquisition of other business(es)............................... --
Repayment of indebtedness....................................... 2,302,873
Working capital................................................. 3,641,287
Temporary investments:
Short-term commercial paper................................... 6,057,160
Long-term corporate and treasury notes........................ 2,112,333
Cash equivalents.............................................. 1,131,344
Other purposes:
Development and expansion of diagnostic product line.......... 5,826,573
Development of information products and services and urologic
disease databases........................................... 2,680,462
Development of therapeutic product line....................... 1,383,839
Development and expansion of clinical and research
laboratories and laboratory information system.............. 3,621,147
</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.
25
<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, 1998, 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,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 14,531 $ 19,758 $ 26,522 $ 32,952 $ 47,606
Operating expenses:
Direct cost of services and products...... 5,891 7,354 9,966 12,574 17,330
Selling, general and administrative
expenses................................ 8,765 9,423 12,735 16,822 24,932
Research and development.................. 1,969 2,267 2,448 2,225 1,953
Special Charges........................... -- -- -- -- 8,206
--------- --------- --------- --------- ---------
Total operating expenses................ 16,625 19,044 25,149 31,621 52,421
--------- --------- --------- --------- ---------
Income (loss) from operations............. (2,094) 714 1,373 1,331 (4,815)
--------- --------- --------- --------- ---------
Other income (expense)...................... (203) (181) 990 1,484 821
--------- --------- --------- --------- ---------
Income (loss) before income taxes........... (2,297) 533 2,363 2,815 (3,994)
--------- --------- --------- --------- ---------
Income tax benefit.......................... -- -- -- 1,437 1,518
--------- --------- --------- --------- ---------
Net income (loss)........................... $ (2,297) $ 533 $ 2,363 $ 4,252 $ (2,476)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic net income (loss) per common
share(1).................................. $ (.43) $ .09 $ .27 $ .42 $ (.24)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding(1).......... 5,376 6,156 8,731 10,203 10,402
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted net income (loss) per common
share(1).................................. $ (.40) $ .08 $ .24 $ .38 $ (.24)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding--assuming
dilution(1)............................... 5,680 6,761 9,832 11,053 10,402
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable investments............. $ 1,823 $ 3,125 $ 33,475 $ 25,606 $ 19,204
Working capital............................. 2,911 5,904 34,910 37,389 34,447
Total assets................................ 7,946 12,494 50,270 54,452 53,320
Long-term debt.............................. 2,063 1,666 659 218 9
Accumulated deficit......................... (14,887) (14,355) (11,991) (7,739) (10,215)
Total stockholders' equity.................. 3,869 8,425 45,687 50,755 48,835
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 to the Financial Statements.
26
<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 markets a comprehensive range of integrated products and services to
assist in detecting, diagnosing, treating and managing prostate cancer, bladder
cancer, kidney stones and other complex urologic disorders directly to
urologists and managed care organizations. The Company's primary focus is
helping urologists improve patient care and outcomes while reducing the total
cost of managing these diseases.
In 1998, the Company derived over 85% 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, such as private insurance,
managed care plans and governmental programs (E.G., Medicare), as well as
individual patients and physicians. For the year ended December 31, 1998,
approximately 46%, 43%, 7% and 4% of the Company's diagnostic revenue was
attributable to Medicare, private insurance and managed care, individual
patients and physicians and hospitals, respectively.
During the year ended December 31, 1998, the Company derived approximately
$6.0 million or 13% of its revenue from the marketing of two therapeutic
products pursuant to a co-promotion agreement entered into with a manufacturer
in October 1997. Under this agreement, the Company recognized revenue when
earned based primarily on the attainment of mutually agreed upon sales goals.
Pursuant to a revised co-promotion agreement between the parties that became
effective January 1, 1999, the Company's compensation is based primarily on
completed sales calls plus a potential bonus if certain sales goals are
attained. Since the criteria for determining the Company's compensation differs
between the current agreement and the original agreement, the Company believes
that revenues recorded for prior periods under the original agreement will not
be indicative of future results under the current agreement, and the Company
currently anticipates that it will not attain the same level of revenues under
the current agreement that it attained under the original agreement in 1998. The
Company also currently has distribution rights for two additional therapeutic
products currently awaiting approval by the FDA.
At the end of the third quarter 1998, the Company took three actions
directed at increasing earnings growth potential. First, the Company decided to
exit the USS business to focus management and other resources on the Company's
core business. Second, the Company accelerated efforts directed at improving its
accounts receivable billing, processing and collection systems and, accordingly,
increased its reserve levels for significantly past due balances. Third, the
Company implemented cost reduction initiatives including elimination of
non-strategic programs and workforce reductions. Special charges related to
these three actions totaled approximately $8.2 million.
27
<PAGE>
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,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Revenue....................................................... 100.0% 100.0% 100.0%
Operating expenses:
Direct cost of services and products........................ 37.6 38.2 36.4
Selling, general and administrative expenses................ 48.0 51.0 52.4
Research and development.................................... 9.2 6.8 4.1
Special charges............................................. -- -- 17.2
--------- --------- ---------
Total operating expenses.................................. 94.8 96.0 110.1
--------- --------- ---------
Income from operations........................................ 5.2 4.0 (10.1)
Other income (expense)........................................ 3.7 4.5 1.7
--------- --------- ---------
Income before income taxes.................................... 8.9 8.5 (8.4)
Income taxes.................................................. -- 4.4 3.2
--------- --------- ---------
Net income.................................................... 8.9% 12.9% (5.2)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue increased 44.5%, from approximately $33.0 million in 1997
to approximately $47.6 million in 1998. This increase was due primarily to an
increase in case volume of 35.7% due primarily to expansion of the Company's
client base from 2,150 to 2,600 urologists in December 1997 and 1998,
respectively, and increased utilization of the Company's diagnostic products and
services by existing clients. Revenue also increased as a result of therapeutic
product co-promotion revenue, from approximately $529,000 in 1997 to
approximately $6.0 million for the year ended December 31, 1998.
DIRECT COST OF SERVICES AND PRODUCTS. Direct cost of services and products
increased 37.8%, from approximately $12.6 million in 1997 to approximately $17.3
million in 1998. This increase was due principally to higher personnel costs and
supply and distribution costs, resulting from increased case volume. Incremental
costs also resulted from USS business operations through the third quarter of
1998, and expanded utilization of the Company's wide area network report
delivery system by the Company's clients. As a percentage of revenue, direct
expenses decreased to 36.4% for 1998 compared to 38.2% in 1997. This decrease
was due principally to growth of the Company's therapeutic revenue with
negligible associated direct costs, offset by growth of the Company's serum
product, which has a lower profit margin than those of most of the Company's
other products, as well as incremental USS operations costs and wide area
network report delivery system costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 48.2%, from approximately $16.8 million in
1997 to approximately $24.9 million in 1998. This increase was due principally
to higher personnel costs related to sales staff, management information
services personnel and accounts receivable personnel and increased provision for
doubtful accounts receivable. As a percentage of revenue, selling, general and
administrative expenses increased to 52.4% for 1998 compared to 51.0% in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
12.3%, from approximately $2.2 million in 1997 to approximately $2.0 million in
1998. This decrease was due primarily to timing of completed external research
activities and elimination of non-strategic projects in the third quarter of
1998. As a percentage of revenue, research and development expenses decreased to
4.1% for 1998 compared to 6.8% in 1997.
28
<PAGE>
SPECIAL CHARGES AND USS OPERATIONS. During the third quarter 1998, the
Company recognized special charges related to three actions. First, the Company
exited the USS business to focus management and other resources on the Company's
core business. The related exit costs totaled approximately $2.2 million and
included estimated expenses for termination and transition of USS' service
contracts, related asset write-downs and severance and outplacement costs for
USS employees. Second, as part of its ongoing assessment of accounts receivable
and reserve adequacy, the Company determined that collection costs on specific
aged segments of its accounts receivable outweighed the expected proceeds.
Accordingly, a provision of $4.7 million was made for these older receivable
balances. Third, the Company implemented cost reduction initiatives including
elimination of non-strategic programs and workforce reductions, resulting in
approximately $889,000 in asset write-downs, approximately $178,000 in severance
and outplacement costs and approximately $218,000 in other non-recurring costs
related to these initiatives. The aggregate charges for these three actions
totaled approximately $8.2 million for the year ended December 31, 1998, and
there were no such charges for the year ended December 31, 1997.
1998 operating losses for the USS business, exclusive of costs to exit the
business, are reflected as operating expenses in excess of associated revenue
and totaled approximately $1.1 million for the year. The following table sets
forth the effects of the special charges and the operating losses of USS on
UroCor's operating income for the year ended December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Operating loss, as reported................................................ ($ 4,814,546)
Operating income, excluding special charges and USS operating losses....... 4,520,157
</TABLE>
OTHER INCOME (EXPENSE). Interest income net of interest expense decreased
from approximately $1.5 million in 1997 to approximately $1.2 million in 1998
due principally to the decrease in cash, cash equivalents and investments
resulting from capital expenditures and an increase in accounts receivable.
Other expenses of approximately $355,000 was primarily due to non-recurring
charges for professional advisor fees related to implementing the Company's
stockholder rights plan and reviewing an unsolicited purported acquisition offer
in the third quarter of 1998. The following table sets forth the effect of the
special charges, the operating losses of USS and the other non-recurring
expenses on UroCor's net income and diluted earnings per share for the year
ended December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Net loss, as reported...................................................... ($ 2,476,359)
Net income, excluding special charges, USS operating losses and other
expenses................................................................. 3,531,766
Diluted loss per share, as reported........................................ (.24)
Diluted earnings per share, excluding special charges, USS operating losses
and other expenses....................................................... .32
</TABLE>
INCOME TAXES. The income tax benefits recorded for 1998 increased from
approximately $1.4 million in 1997 to approximately $1.5 million in 1998
reflecting federal and state income tax benefits at a 38% effective rate for
1998. 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.
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
29
<PAGE>
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.
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, changes in the mix of products sold, the timing and
results of accounts receivable collections and write-offs, the timing and costs
of new product
30
<PAGE>
and technology introductions by the Company or its competitors and retention and
expansion of the Company's sales force.
The Company's results of operations for the fourth quarter of 1997 include a
$1.4 million income tax benefit. Results for the third quarter of 1998 includes
special charges of $4.7 million to increase the allowance for doubtful accounts,
$2.2 million related to USS exit costs, and $1.3 million related to
non-strategic program asset write-offs and other restructuring costs including
severance costs for workforce reduction.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------------------------------------------------------------------------------------
1996 1997 1998
------------------------------ ------------------------------ ----------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $5,908 $6,449 $6,476 $7,689 $8,079 $7,795 $7,786 $9,293 $10,614 $11,264 $11,802 $13,926
Operating Expenses:
Direct costs of services and
products.................. 2,138 2,390 2,576 2,861 2,981 2,924 3,171 3,499 4,048 4,421 4,555 4,307
Selling, general and
administrative expenses... 2,862 3,104 3,159 3,611 3,690 3,991 3,953 5,188 5,569 5,931 6,048 7,384
Research and development.... 644 649 540 615 610 611 498 506 508 499 531 414
Special charges............. -- -- -- -- -- -- -- -- -- -- 8,206 --
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from
operations.................. 264 306 201 602 798 269 164 100 489 413 (7,538) 1,821
Other income (expense)........ (33) 161 434 428 403 371 358 352 336 297 (67) 255
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before income
taxes....................... 231 467 635 1,030 1,201 640 522 452 825 710 (7,605) 2,076
Income tax benefit
(expense)................... -- -- -- -- -- -- -- 1,437 (313) (270) 2,884 783
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)............. $ 231 $ 467 $ 635 $1,030 $1,201 $ 640 $ 522 $1,889 $ 512 $ 440 $(4,721) $ 1,293
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- -------
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- -------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, cash, cash equivalents and marketable investments
totaled approximately $19.2 million, and the Company's working capital was
approximately $34.4 million. As of December 31, 1998, the components of cash,
cash equivalents and marketable investments were cash and cash equivalents of
approximately $11.0 million, short-term marketable investments of $6.1 million
and long-term marketable investments of approximately $2.1 million. Such
marketable investments consisted principally of high-grade fixed income
securities, with a maturity of less than two years.
Accounts receivable, net of allowance for doubtful accounts, totaled
approximately $16.0 million at December 31, 1998, an increase of approximately
$2.3 million from December 31, 1997, or 17.1%. This increase is attributable to
an increase in accrued therapeutics revenue of $2.3 million, and increased
diagnostics receivables of $3.4 million offset by a like increase in the
allowance for doubtful accounts. At December 31, 1998, the Company's average
number of days sales in net diagnostics receivables was approximately 110
compared to approximately 142 at December 31, 1997. This decline is principally
due to the increased allowance for doubtful accounts.
Virtually all of the Company's diagnostic services are rendered on a
fee-for-service basis. Accordingly, the Company assumes the financial risk
related to collection, including potential uncollectability of accounts, long
collection cycles for accounts receivable, difficulties in gathering complete
and accurate billing information and delays attendant to reimbursement by
third-party payors, such as governmental programs, private insurance plans and
managed care organizations.
The Company monitors the collection quality of its accounts receivable
through analytical review of aging categories by payor group and collections
performance. In the third quarter of 1998, the Company recorded a special charge
of $4.7 million to increase the allowance for doubtful accounts in respect of
certain accounts for which the Company determined that the cost of additional
collection efforts would exceed the expected collections. In addition, in 1998,
the Company determined that due to oversights in the implementation and
administration of certain marketing arrangements, the Company did not send
31
<PAGE>
invoices timely to certain patients, primarily managed care patients, for
certain co-pay, deductible and other amounts relating principally to services
rendered in 1998. In December 1998, the Company commenced collection efforts for
certain of these amounts. The Company has taken steps to implement systems and
processing changes intended to improve its billing procedures and related
collection results, including actions taken in respect to the oversights
determined in 1998. While the Company maintains what it believes to be an
adequate allowance for doubtful accounts, there can be no assurance that the
Company's ongoing assessment of accounts receivable will not result in the need
for additional provision for doubtful accounts. Such additional provision could
have an adverse effect on the Company's results of operations.
The Company believes that the potential patient and client reaction as a
result of the Company's delay in sending invoices to patients for the co-pay,
deductible and other amounts determined in 1998, could result in some of the
urologists for such patients discontinuing or reducing their use of the
Company's diagnostic services. The loss of any of such clients' business could
adversely affect the rate of the Company's growth in revenues and the Company's
results of operations.
Operating activities used net cash of approximately $891,000 in 1998, used
net cash of approximately $1.8 million in 1997 and provided net cash of
approximately $479,000 in 1996. The net cash used by operating activities in
1998 was primarily the result of the net loss of approximately $2.5 million in
that year and the related deferred tax benefit of approximately $1.5 million and
an increase in accounts receivable of approximately $2.3 million and other
current assets of approximately $490,000, offset in part by loss on asset write
downs of approximately $2.0 million, depreciation and amortization of
approximately $2.6 million and an increase in accounts payable of approximately
$1.2 million.
Net cash provided by investing activities for 1998 was approximately $5.0
million and consisted primarily of maturities of short-term marketable
investments of approximately $10.6 million, offset by capital expenditures of
approximately $5.3 million, an increase in intangibles and other assets of
approximately $263,000 and purchases of long-term marketable investment of
approximately $100,000 and purchases of short-term investments of approximately
$10.6 million. Net cash provided by financing activities was approximately
$11,000 for 1998, consisting primarily of proceeds of stock issuances pursuant
to the employee stock purchase plan of approximately $193,000, exercises of
stock warrants of approximately $191,000 and exercise of stock options of
approximately $67,000, offset by principal payments under capital leases and
other indebtedness of approximately $441,000.
The Company's capital expenditures of approximately $5.3 million in 1998
were primarily for computer hardware and software, furniture and fixtures and
software development for the Company's information services. Of the total
amount, approximately $1.3 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 1999, the Company expects to relocate to a new building, which is
currently being constructed adjacent to the Company's existing facilities. The
Company has committed to funding a portion of the building tenant improvements
and expects to spend in excess of $2.5 million beginning in the first quarter
1999 for such improvements and other capital expenditures related to moving to
the new building. The Company intends to finance the majority of these capital
expenditures with existing cash and investment balances.
In October 1997, the Company entered into a co-promotion agreement with the
manufacturer of two therapeutic products pursuant to which, for the year ended
December 31, 1998, the Company recorded revenue of approximately $6.0 million.
Pursuant to this agreement, the Company recognized revenue when earned based
primarily on the attainment of mutually agreed upon sales goals. Pursuant to a
revised agreement entered into between the parties that became effective January
1, 1999, the Company's compensation is based primarily upon sales calls
completed by the Company with a potential bonus if
32
<PAGE>
certain sales goals are attained. Since the criteria for determining the
Company's compensation differs under the current agreement from the original
agreement, the Company does not believe that revenues recorded for prior periods
under the original agreement will be indicative of future revenues under the
current agreement, and the Company currently anticipates that it will not attain
the same level of revenues under the current agreement that it attained under
the original agreement in 1998. The current agreement also is subject to
termination upon the occurrence of certain events or by either party in its
discretion giving the other party prior notice of 90 days of termination without
cause on or after September 30, 1999.
In December 1994, the Company obtained distribution rights to a therapeutic
product currently under review for marketing approval by the FDA. Prior to 1998,
the Company made aggregate milestone payments of $1.25 million. 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 is required to make this payment, it intends to do so from existing cash
and investment balances. The Company may terminate this agreement at any time
prior to FDA approval of the product and recoup the equivalent of payments
already made.
During 1998, the Company obtained marketing and other rights to two other
therapeutic products, and is obligated to pay up to $750,000 to the
manufacturers based on achievement of certain milestones. If the Company is
required to make these payments, it intends to do so from existing cash and
investment balances.
The Company paid current income taxes of approximately $550,000 during 1998.
At December 31, 1998, the Company estimated net operating loss carryforwards of
approximately $3.7 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.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programming being written
using two digits rather than four to define the applicable year. Any of the
Company's systems, as well as those of key vendors, payors and customers, that
have date sensitive logic may interpret a date using "00" as the year 1900
rather than 2000. This may result in inaccurate processing or possible system
failure causing potential disruption of operations, including among other things
a temporary inability to process transactions, send bills for services or engage
in similar normal business activities.
The Company has implemented a Year 2000 program to address its current
information systems, desktop systems, laboratory equipment and infrastructures.
The program also addresses the Year 2000 readiness of key vendors and suppliers,
corporate partners, governmental agencies, banks and key customers and clients.
The program is being administered by an internal task force and consists of the
following phases:
Phase 1 is the compilation of an inventory of systems and relationships with
suppliers, key customers and other business partners. This phase is expected
to be completed early in the second quarter of 1999.
Phase 2 is the final assessment of each item identified in the inventory,
verification of each item's compliance with Year 2000 requirements and a
resulting financial risk analysis. Anticipated completion for this phase is
the second quarter of 1999.
33
<PAGE>
Phase 3 is the resolution of any issues identified in phase 2 and the
development of a contingency plan to deal with internal and external risks
associated with the Year 2000 issue. It is anticipated that this phase will
be complete by the end of the third quarter of 1999.
In 1998, UroCor's initial assessment of its internal computer systems and
related applications indicated that these systems and applications are prepared
to accommodate date-sensitive information relating to the Year 2000 issue.
UroCor expects that any additional costs related to ensuring such systems to be
Year 2000 compliant will not be material to the financial condition or results
of operations of the Company and to fund such costs through existing working
capital and operating cash flows. The Company estimates that the total future
expenditures specifically relating to the Year 2000 project will be less than
$75,000. However, there is no assurance that a complete review will not identify
additional costs and efforts that will be required and could cause actual
results to differ materially from expectations.
Additionally, the ability of third parties with whom UroCor transacts
business to address their Year 2000 issues adequately is outside the Company's
control. There can be no assurance that the failure of such third parties to
identify and address their respective Year 2000 issues adequately will not have
a material adverse effect on the Company's financial condition or results of
operations. The most significant exposure is to the federal government's
Medicare and Medicaid programs and with major insurance companies. These
customer in aggregate represent a material portion of the Company's revenue and
corresponding cash flow. As to supplier and vendors, the most significant are
those associated with services and products supply and distribution. To date,
the Company is not aware of any problems that would materially impact results of
operations, liquidity, or capital resources. As the ability of these third
parties to address their Year 2000 issues adequately is outside the Company's
control, there can be no assurance that the failure of 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.
As a result of the Company's risk analysis which will be completed as a part
of Phase 2, the Company will develop a contingency plan in the event that it is
unable to achieve Year 2000 readiness of its critical operations. The Company
plans to evaluate the status of completion of its Year 2000 efforts no later
than June 30, 1999 and determine whether a contingency plan is necessary. There
can be no assurances that the Company will be able to develop contingency plans
that will adequately address all Year 2000 issues that may arise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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 and are classified as Available-for-Sale. Marketable securities at
December 31, 1998 consisted primarily of debt securities with maturities as
great as two years. 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, 1997 and 1998, there was
not a material net unrealized gain or loss on these investments.
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-18 of this Annual
Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
<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
14, 1999 under the caption "Election of Directors" and "Executive Officers",
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
14, 1999 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
14, 1999 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
14, 1999 under the caption "Certain Relationships and Related Transactions",
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
<TABLE>
<CAPTION>
1. FINANCIAL STATEMENTS PAGE
---------
<S> <C>
Index to Financial Statements.................................................... F-1
Report of Independent Public Accountants......................................... F-2
Balance Sheets as of December 31, 1997 and 1998.................................. F-3
Statements of Operations for the years ended December 31, 1996, 1997 and 1998.... F-4
Statements of Stockholders' Equity for the years ended December 31, 1996, 1997
and 1998....................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998.... 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
</TABLE>
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
35
<PAGE>
(C) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to a
prior filing as indicated.
Exhibits designated by the symbol + are management contracts or compensatory
plans or arrangements that are required to be filed with this report
pursuant to this Item 14.
UroCor undertakes to furnish to any stockholder so requesting a copy of any
of the following exhibits upon payment to the Company of the reasonable costs
incurred by Company in furnishing any such exhibit.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation, as amended (incorporated by reference to Exhibit
3.1 to the Registrant's Form 10-Q for the quarterly period ended September 30,
1998, filed with the Commission on November 12, 1998).
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).
4.1 Rights Agreement dated as of August 17, 1998, between the Company and American
Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed with the
Commission on August 21, 1998).
4.2 Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K, filed with the Commission on August
21, 1998).
10.1+ The UroCor, Inc. Second Amended and Restated 1992 Stock Option Plan, as amended
(incorporated by reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-58015), filed with the Commission on June
29, 1998).
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 Amendment No. 2 dated June 16, 1998, amending the Lease Agreement between
Presbyterian Health Foundation, as Landlord and UroCor, Inc., as Tenant dated
April 15, 1994 (incorporated by reference to the Registrant's Form 10-Q for the
quarterly period ended September 30, 1998, filed with the Commission November
12, 1998).
10.5* Amendment No. 3 dated February 1, 1999, amending the Lease Agreement between
Presbyterian Health Foundation, as Landlord and UroCor, Inc., as Tenant dated
April 15, 1994.
10.6+ 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).
10.7+ 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).
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
10.8+ 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).
10.9+ 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).
10.10+ Employment Agreement dated July 23, 1998, between Michael W. George and UroCor,
Inc. (incorporated by reference to the Registrant's Form 10-Q for the quarterly
period ended September 30, 1998, filed with the Commission on November 12,
1998).
10.11+* Employment Agreement dated January 29, 1998 between Karl Nigg and UroCor, Inc.
10.12+* Form of Indemnity Agreement between UroCor, Inc. and each of the individuals
named in Schedule 10.12 thereto.
10.13+* 1998 Management Incentive Compensation Plan.
10.14 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).
10.15 Master Equipment Lease dated May 17, 1995, between Financing for Science
International, Inc. and UroCor, Inc., and Commitment Letter dated March 18,
1996, between Financing for Science International, Inc. and UroCor, Inc.
(incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Reg. No. 333-3182), filed with the Commission on April 3, 1996).
10.16+ 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).
10.17+ The UroCor, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (Reg. No.
333-58017), filed with the Commission on June 29, 1998).
10.18+* Form of Change In Control Agreement between UroCor, Inc. and each of the
individuals named and with the terms listed on Schedule 10.18 thereto.
23.1* Consent of Arthur Andersen LLP.
</TABLE>
37
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1997 and 1998....................................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and 1998......... F-4
Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and
1998................................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998......... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of UroCor, Inc.:
We have audited the accompanying balance sheets of UroCor, Inc. (a Delaware
corporation) as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1997 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
February 5, 1999
F-2
<PAGE>
UROCOR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 6,896,033 $ 11,034,123
Short-term marketable investments................................................ 16,697,067 6,057,160
Accounts receivable, net of allowance for doubtful accounts of $2,619,485 in 1997
and $6,029,066 in 1998......................................................... 13,631,144 15,964,744
Prepaid expenses................................................................. 988,659 946,403
Laboratory supplies, at average cost............................................. 497,639 458,569
Inventory........................................................................ 111,096 236,328
Deferred tax asset, net.......................................................... 1,470,781 3,159,855
Other current assets............................................................. 575,875 1,065,909
------------- --------------
Total current assets........................................................... 40,868,294 38,923,091
------------- --------------
LONG-TERM MARKETABLE INVESTMENTS................................................... 2,012,656 2,112,333
PROPERTY AND EQUIPMENT, net........................................................ 8,555,511 9,969,245
NON-CURRENT DEFERRED TAX ASSET, net................................................ 358,684 174,671
INTANGIBLE AND OTHER ASSETS, net................................................... 2,656,974 2,140,599
------------- --------------
Total assets................................................................... $ 54,452,119 $ 53,319,939
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 2,263,645 $ 3,490,381
Accrued compensation............................................................. 665,817 404,444
Current installments of obligations under capital leases......................... 441,435 209,092
Other accrued liabilities........................................................ 108,421 372,427
------------- --------------
Total current liabilities...................................................... 3,479,318 4,476,344
OBLIGATIONS UNDER CAPITAL LEASES, net of current installments...................... 217,697 8,607
------------- --------------
Total liabilities.............................................................. 3,697,015 4,484,951
------------- --------------
COMMITMENTS AND CONTINGENCIES (FOOTNOTE 5 AND 6)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value--authorized 6,000,000 shares at
December 31, 1997 and 1998; issued in series; no shares outstanding at December
31, 1997 and 1998.............................................................. -- --
Common stock, $.01 par value, authorized 20,000,000 shares at December 31, 1997
and 1998; 10,345,616 shares issued and outstanding at December 31, 1997 and
10,492,726 shares issued and outstanding at December 31, 1998.................. 103,456 104,927
Additional paid-in capital....................................................... 58,390,646 58,945,418
Accumulated deficit.............................................................. (7,738,998) (10,215,357)
------------- --------------
Total stockholders' equity................................................... 50,755,104 48,834,988
------------- --------------
Total liabilities and stockholders' equity................................... $ 54,452,119 $ 53,319,939
------------- --------------
------------- --------------
</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,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE............................................... $26,522,205 $32,951,514 $47,606,143
OPERATING EXPENSES:
Direct cost of services and products................ 9,965,639 12,574,164 17,330,508
Selling, general and administrative expenses........ 12,735,294 16,821,240 24,932,017
Research and development............................ 2,447,501 2,225,162 1,952,558
Special charges..................................... -- -- 8,205,606
---------- ---------- ----------
Total operating expenses.......................... 25,148,434 31,620,566 52,420,689
---------- ---------- ----------
OPERATING INCOME (LOSS)............................... 1,373,771 1,330,948 (4,814,546)
OTHER INCOME (EXPENSE):
Interest, net....................................... 989,613 1,484,061 1,176,238
Other............................................... -- -- (355,820)
---------- ---------- ----------
Total other income (expense)...................... 989,613 1,484,061 820,418
---------- ---------- ----------
Income (loss) before income taxes..................... 2,363,384 2,815,009 (3,994,128)
Income tax benefit.................................... -- 1,437,172 1,517,769
---------- ---------- ----------
NET INCOME (LOSS)..................................... $2,363,384 $4,252,181 $(2,476,359)
---------- ---------- ----------
---------- ---------- ----------
NET INCOME (LOSS) PER SHARE:
Basic:
Net Income (Loss) Per Common Share.................. $ .27 $ .42 $ (.24)
---------- ---------- ----------
---------- ---------- ----------
Weighted Average Common and Common Equivalent Shares
Outstanding....................................... 8,731,369 10,203,081 10,402,281
---------- ---------- ----------
---------- ---------- ----------
Diluted:
Net Income (Loss) Per Common Share--Assuming
Dilution.......................................... $ .24 $ .38 $ (.24)
---------- ---------- ----------
---------- ---------- ----------
Weighted Average Common and Common Equivalent Shares
Outstanding--Assuming Dilution.................... 9,831,546 11,052,540 10,402,281
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
UROCOR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK--ISSUED
IN SERIES CLASS A STOCK CLASS B STOCK
------------------------ ---------------------- ----------------------
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
----------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................... 5,706,395 $ 57,064 513,093 $ 5,131 66,666 $ 667
Stock issuance--
Conversion of Preferred, Class A, and Class
B............................................ (5,706,395) (57,064) (513,093) (5,131) (66,666) (667)
Initial Public Offering...................... -- -- -- -- -- --
Exercise of warrants......................... -- -- -- -- -- --
Exercise of stock options.................... -- -- -- -- -- --
Stock Option--
Compensation Expense......................... -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
----------- ----------- --------- ----------- --------- -----
BALANCE AT DECEMBER 31, 1996................... -- $ -- -- $ -- -- $ --
Stock Issuance--
Exercise of warrants......................... -- -- -- -- -- --
Exercise of stock options.................... -- -- -- -- -- --
Stock Option--
Compensation Expense......................... -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
----------- ----------- --------- ----------- --------- -----
BALANCE AT DECEMBER 31, 1997................... -- $ -- -- $ -- -- $ --
Stock Issuance--
Exercise of warrants......................... -- -- -- -- -- --
Employee Stock Purchase Plan................. -- -- -- -- -- --
Exercise of stock options.................... -- -- -- -- -- --
Stock Option--
Compensation Expense......................... -- -- -- -- -- --
Net loss....................................... -- -- -- -- -- --
----------- ----------- --------- ----------- --------- -----
BALANCE AT DECEMBER 31, 1998................... -- $ -- -- $ -- -- $ --
----------- ----------- --------- ----------- --------- -----
----------- ----------- --------- ----------- --------- -----
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT EQUITY
----------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................... 69,188 $ 692 $ 22,716,005 $ (14,354,563) $8,424,996
Stock issuance-- (1,962)
Conversion of Preferred, Class A, and Class
B............................................ 6,482,360 64,824 -- --
Initial Public Offering...................... 3,450,000 34,500 34,515,359 -- 34,549,859
Exercise of warrants......................... 63,059 630 181,903 -- 182,533
Exercise of stock options.................... 36,700 367 35,812 -- 36,179
Stock Option-- 129,607
Compensation Expense......................... -- -- -- 129,607
Net income..................................... -- -- -- 2,363,384 2,363,384
----------- -------------- ------------ ------------- ------------
BALANCE AT DECEMBER 31, 1996................... 10,101,307 $ 101,013 $ 57,576,724 $ (11,991,179) $45,686,558
Stock Issuance-- 516,537
Exercise of warrants......................... 131,361 1,314 -- 517,851
Exercise of stock options.................... 112,948 1,129 122,437 -- 123,566
Stock Option-- 174,948
Compensation Expense......................... -- -- -- 174,948
Net income..................................... -- -- -- 4,252,181 4,252,181
----------- -------------- ------------ ------------- ------------
BALANCE AT DECEMBER 31, 1997................... 10,345,616 $ 103,456 $ 58,390,646 $ (7,738,998) $50,755,104
Stock Issuance-- 190,831
Exercise of warrants......................... 50,945 509 -- 191,340
Employee Stock Purchase Plan................. 33,658 337 192,955 -- 193,292
Exercise of stock options.................... 62,507 625 66,737 -- 67,362
Stock Option-- 104,249
Compensation Expense......................... -- -- -- 104,249
Net loss....................................... -- -- -- (2,476,359) (2,476,359)
----------- -------------- ------------ ------------- ------------
BALANCE AT DECEMBER 31, 1998................... 10,492,726 $ 104,927 $ 58,945,418 $ (10,215,357) $48,834,988
----------- -------------- ------------ ------------- ------------
----------- -------------- ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
UROCOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $ 2,363,384 $ 4,252,181 $ (2,476,359)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...................................... 1,115,994 1,597,002 2,604,075
Deferred income tax benefit........................................ -- (1,749,465) (1,505,061)
Stock option compensation expense.................................. 129,607 174,948 104,249
Loss on asset write downs.......................................... 2,020,204
Changes in current assets and liabilities:
Increase in accounts receivable.................................. (3,783,615) (5,352,701) (2,333,600)
(Increase) decrease in prepaid expense........................... (245,014) (321,997) 42,256
(Increase) decrease in laboratory supplies....................... (449,263) 185,769 39,070
Increase in inventory............................................ -- (106,689) (125,232)
Increase in other current assets................................. (410,934) (219,214) (490,034)
Increase in accounts payable..................................... 1,406,957 303,199 1,226,736
Increase (decrease) in accrued compensation...................... 352,386 (560,159) (261,373)
Increase (decrease) in other accrued liabilities................. (516) (5,931) 264,006
------------- ------------ ------------
Net cash provided by (used in) operating activities............ 478,986 (1,803,057) (891,063)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities (purchases) of short-term marketable investments, net... (5,975,500) (2,999,483) 10,639,907
Maturities (purchases) of long-term marketable investments, net.... (11,703,521) 1,968,781 (99,677)
Capital expenditures............................................... (3,413,967) (5,814,064) (5,258,771)
Proceeds from capital leases....................................... 385,511 -- --
Intangible and other assets........................................ (242,278) (270,186) (262,869)
------------- ------------ ------------
Net cash provided by (used in) investing activities............ (20,949,755) (7,114,952) 5,018,592
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock issuances.................................. 34,549,859 -- --
Proceeds from employee stock purchase plan......................... -- -- 193,292
Proceeds from exercise of stock options............................ 36,179 123,566 67,362
Proceeds from exercise of warrants................................. 182,533 517,851 191,340
Principal payments under capital lease obligations and other
indebtedness..................................................... (927,028) (623,445) (441,435)
Proceeds from line of credit....................................... 600,000 -- --
Payments on line of credit......................................... (1,300,000) -- --
------------- ------------ ------------
Net cash provided by financing activities...................... 33,141,543 17,972 10,559
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents................. 12,670,774 (8,900,037) 4,138,090
CASH AND CASH EQUIVALENTS, beginning of year......................... 3,125,296 15,796,070 6,896,033
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period............................. $ 15,796,070 $ 6,896,033 $ 11,034,123
------------- ------------ ------------
------------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................... $ 198,476 $ 106,147 $ 47,458
Cash paid for income taxes..................................... 48,000 350,000 550,000
</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, 1998
1. THE COMPANY:
UroCor, Inc. ("the Company"), a Delaware corporation, markets a
comprehensive range of integrated products and services to assist in detecting,
diagnosing, treating and managing prostate cancer, bladder cancer, kidney stones
and other complex urologic disorders directly to urologists and managed care
organizations. The Company's primary focus is helping urologists improve patient
care and outcomes while reducing the total cost of managing these 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, 1997 and 1998. Marketable securities at December 31, 1998
consist primarily of debt securities with maturities as great as two years. The
aggregate cost of marketable securities at December 31, 1998 was approximately
$8.2 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, 1997 and 1998, there was not a material
net unrealized gain or loss on these investments.
(c) INVENTORY. Inventories are stated at lower of cost or market using the
first-in, first-out method. Inventory costs consist primarily of products
acquired for resale.
(d) 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".
(e) 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, 1996, 1997 and 1998 were $346,000, $1,122,000, and
$1,272,000, respectively.
F-7
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(f) 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.
(g) 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, 1998 the Company had
commitments under external research contracts totaling approximately $55,000 for
1999 and $1,000 for 2000.
(h) INCOME TAXES. 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.
(i) REVENUE. Revenue is recognized when products are sold or services are
rendered. Revenue subject to Medicare or third-party reimbursement is recorded
at estimated reimbursable amounts. The Company receives a significant portion of
its revenue from tests performed principally for beneficiaries of the Medicare
program. In 1996, 1997 and 1998, approximately 52%, 47%, and 46%, 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.
Revenue from LithoSavant software licenses is recognized as license fees
accrue and from maintenance and services over the contractual period or as the
services are performed.
(j) NET INCOME PER COMMON SHARE. The Company accounts for earnings per
share under Statement of Financial Accounting Standards No. 128 ("SFAS 128").
Under SFAS 128, there are two earnings per share figures disclosed, basic and
diluted. Diluted earnings per share reflects the effect of dilutive securities
calculated using the treasury stock method and the average market price of
common stock for each period, unless the result is antidilutive, in which case
such securities are not considered.
(k) 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.
(l) RECLASSIFICATIONS. Certain reclassifications have been made in the
1996 and 1997 financial statements to conform with the 1998 presentation. Total
assets and net income for 1996 and 1997 were not affected by the
reclassifications.
F-8
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. PROPERTY AND EQUIPMENT:
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Laboratory equipment............................................ $ 2,258,267 $ 2,650,797
Computer equipment and software................................. 7,920,132 10,099,014
Office furniture, equipment and improvements.................... 2,456,994 3,582,926
------------- -------------
12,635,393 16,332,737
Less--Accumulated depreciation and amortization................. (4,079,882) (6,363,492)
------------- -------------
$ 8,555,511 $ 9,969,245
------------- -------------
------------- -------------
</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>
1997 1998
------------ ------------
<S> <C> <C>
Licenses, options, patents and trademarks......................... $ 814,511 $ 502,583
Less--Accumulated amortization.................................... (65,650) (6,940)
------------ ------------
748,861 495,643
Software costs.................................................... 455,071 --
Marketing agreement (Note 6)...................................... -- 250,000
Distribution agreement (Note 6)................................... 1,250,000 1,250,000
Deposits and other................................................ 203,042 144,956
------------ ------------
$ 2,656,974 $ 2,140,599
------------ ------------
------------ ------------
</TABLE>
5. 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 arrangements as capital leases with the capital asset amortized over
the lease term. At December 31, 1997
F-9
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. LEASES: (CONTINUED)
and 1998, the gross amount of property and equipment and related amortization
recorded under capital leases was as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Laboratory equipment............................................ $ 1,593,706 $ 1,571,445
Computer equipment.............................................. 914,400 895,596
Office furniture and equipment.................................. 638,056 637,592
------------- -------------
3,146,162 3,104,633
Less--Accumulated depreciation and amortization................. (2,605,965) (2,950,636)
------------- -------------
$ 540,197 $ 153,997
------------- -------------
------------- -------------
</TABLE>
The Company also has noncancelable operating leases for laboratory
facilities, office space and equipment that expire over the next fourteen years,
with certain options for early termination. Rental expense for operating leases
during 1996, 1997 and 1998 approximated $503,000, $887,000 and $1,340,000,
respectively.
Future minimum lease commitments as of December 31, 1998 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -------------
<S> <C> <C>
1999.............................................................. $ 219,771 $ 1,397,440
2000.............................................................. 8,722 1,313,505
2001.............................................................. -- 1,314,277
2002 -- 1,241,497
2003 -- 1,288,221
Thereafter (laboratory and office space to 2013).................. -- 13,141,211
----------- -------------
Total minimum lease payments...................................... 228,493 $ 19,696,150
-------------
-------------
Less--Amount representing interest................................ (10,794)
-----------
Total obligations under capital leases............................ 217,699
Less--Current installments of obligations under capital leases.... (209,092)
-----------
Obligation under capital leases, net of current installments...... $ 8,607
-----------
-----------
</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. In June 1998, the Company amended
its lease agreement to reflect the Company's planned relocation to an adjacent
building currently under construction. The Company anticipates it will relocate
to the new facility by mid-1999. Pursuant to the lease amendment, the Company's
rent for its facilities will increase by approximately $270,000 per year,
subject to annual adjustment. Future monthly rentals are included in the
operating lease commitments above. The lease expires by its terms in 2013,
subject to early termination provisions.
F-10
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. COMMITMENTS AND CONTINGENCIES:
(a) HEALTHCARE REGULATION. The healthcare industry in general, and the
services and products that the Company provides are subject to extensive federal
and state laws and regulations. Additionally, a significant portion of the
Company's net revenue is derived from payments by government-sponsored health
care programs, principally Medicare, and is subject to audit and adjustments by
applicable regulatory agencies. Failure to comply with any of these laws or
regulations, the results of regulatory audits and adjustments, or changes in the
amounts payable for the Company's services under these programs could have a
material adverse effect on the Company's financial position and results of
operations.
In July 1998, the Company received a CID from the DOJ concerning allegations
that the Company may have submitted false claims in connection with bills for
services submitted to Medicare and other federal insurance programs. The Company
received a second CID from the DOJ in March 1999 concerning allegations that the
Company may have submitted false claims for payment, submitted false statements
in support of false claims, or conspired to submit false claims to government
officials in connection with bills for services submitted to Medicare and other
federal insurance programs by, among other things, bundling tests, billing for
medically unnecessary tests and upcoding. The DOJ has given the Company no
further information regarding the allegations. The CIDs require the Company to
produce certain documents to the DOJ. The Company produced documents to the DOJ
in response to the initial CID, intends to produce documents to the DOJ in
response to the second CID and intends to cooperate fully with the DOJ with
respect to this investigation. Although the Company seeks to structure its
practices to comply with all applicable laws, no assurances may be given
regarding the resolution of this matter, and the Company is unable to predict
its impact, if any, on the Company. If the DOJ were to pursue and prevail on
matters that may arise from this investigation, any significant recoupment of
funds or civil or criminal penalty or exclusion from federal and state health
care programs potentially resulting from such proceedings would have a material
adverse effect on the financial condition and results of operations of the
Company.
(b) 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, 1997 and 1998. The
Company will be required to make a milestone payment of $1.75 million when and
if regulatory approval by the FDA is received. The Company may terminate this
agreement at any time prior to FDA approval and recoup the equivalent of
payments already made. In connection with this agreement, the Company also
granted the manufacturer a warrant, expiring December 30, 1999, to purchase
100,000 shares of the Company's common stock at a price to be equal to the fair
market value of a share of the Company's common stock on the date that
regulatory approval is received from the FDA.
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
F-11
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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.
(c) THERAPEUTICS. In 1998, the Company entered into a marketing agreement
which grants the Company certain marketing rights covering a therapeutic product
for a period of at least five years. The Company will be required to make
payments totaling $750,000 upon the achievement of certain milestones.
(d) 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 twelve months following termination
without cause, aggregating approximately $694,000.
7. RELATED PARTY TRANSACTIONS:
In 1996 and 1997, the Company paid fees for consulting services to a member
of the Board of Directors. These fees are included in expenses and total
approximately $36,000 and $24,000 in 1996 and 1997, respectively. No such fees
were paid in 1998. In addition, the Company recognized rent expense totaling
$414,000, $535,000, and $609,000 for 1996, 1997 and 1998, 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.
8. 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.
WARRANTS. At December 31, 1998, there were warrants outstanding for the
purchase of an aggregate of 224,436 shares of the Company's common stock
exercisable at prices ranging from $1.25 to $5.00 per share and expiring from
December 1999 to May 2001. No value was attributed to these warrants in
connection with their issuances in 1994 through 1995. A summary of the warrants
outstanding is presented below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
WARRANTS PER SHARE WARRANTS PER SHARE WARRANTS PER SHARE
--------- ------------- --------- ------------- --------- -------------
Outstanding, beginning of year............. 486,310 $1.25 - 5.50 423,251 $1.25 - 5.00 291,438 $1.25 - 5.00
Granted.................................... -- --
Expired.................................... -- -- 13,358 $4.30
Exercised.................................. 63,059 $1.25 - 4.30 131,813 $1.25 - 4.30 53,644 $1.25 - 5.00
--------- --------- ---------
Outstanding, end of year................... 423,251 $1.25 - 5.50 291,438 $1.25 - 5.00 224,436 $1.25 - 5.00
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. STOCKHOLDERS' EQUITY: (CONTINUED)
STOCKHOLDER RIGHTS PLAN. In August 1998, the Board of Directors adopted a
stockholder rights plan (the "Plan") that provides the holders of each share of
Common Stock with a Preferred Share purchase right (a "Right"). This Plan is
intended to protect the Company and its stockholders from coercive or unfair
takeover tactics. Each Right will entitle holders of the Company's Common Stock
to buy one one-thousandth of an interest in a share of Series I Preferred Stock
of the Company at an exercise price of $35.00, exercisable only if a person or
group acquires beneficial ownership of 15% or more of UroCor's Common Stock or
announces a tender or exchange offer upon consummation of which such person or
group would beneficially own 15% or more of the Company's Common Stock. If any
person becomes the beneficial owner of 15% or more of UroCor's Common Stock,
each Right not owned by such person or related parties will enable its holder to
purchase, at the Right's then-current exercise price, shares of Common Stock of
the Company having a value of twice the Right's exercise price. In addition, if
the Company is involved in a merger or other business combination transaction
with another person in which its common shares are changed or converted, or
sells 50% or more of its assets to another person, each Right that has not
previously been exercised will entitle its holder to purchase, at the Right's
then-current exercise price, common shares of such other person having a value
of twice the Right's exercise price. The Rights have no voting power and will
expire on August 27, 2008. The Company will generally be entitled to redeem the
Rights at $.001 per Right at any time until the tenth business day following
public announcement that a 15% position has been acquired.
9. STOCK COMPENSATION PLANS:
(a) STOCK OPTION PLANS. 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. During 1998, the shareholders of
the Company approved an additional 300,000 shares for the 1992 Option Plan.
A summary of the status of the plans is presented below:
<TABLE>
<CAPTION>
1996 1997
------------------------- ------------------------- 1998
WTD-AVERAGE WTD-AVERAGE ---------------------------
EXERCISE EXERCISE WTD-AVERAGE
SHARES PRICE SHARES PRICE SHARES EXERCISE PRICE
---------- ------------- ---------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........ 982,344 $ 1.10 1,053,544 $ 2.43 1,305,487 $ 4.36
Granted, price equals fair value...... 149,000 10.83 342,750 8.02 465,000 5.80
Granted, price greater than fair
value............................... 115,000 10.00 -- --
Exercised............................. (36,700) .99 (112,748) 1.10 (62,507) 1.08
Cancellations......................... (41,100) 2.52 (92,859) 6.98 (127,652) 6.78
---------- ---------- ----------
Outstanding, end of year.............. 1,053,544 $ 2.43 1,305,487 $ 4.36 1,580,328 $ 4.71
---------- ---------- ----------
---------- ---------- ----------
Exercisable, end of year.............. 520,091 $ 1.04 618,529 $ 1.45 845,884 $ 2.91
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-13
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. STOCK COMPENSATION PLANS: (CONTINUED)
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 is recognizing
imputed compensation expense as a non-cash charge to operations, aggregating
approximately $410,000 over the actual vesting period of these options of three
to five years. During 1996, 1997 and 1998 the Company recognized approximately
$129,000, $127,500 and $123,000, respectively, of compensation expense related
to these options.
This table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
NUMBER NUMBER
RANGE OF EXERCISE OUTSTANDING AT WTD-AVERAGE WTD-AVERAGE EXERCISABLE AT WTD-AVERAGE
PRICES DECEMBER 31, 1998 REMAINING LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- ----------------- ----------------- -------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$.35 - 1.00 405,644 4.9 $0.68 398,744 $0.67
1$.25 - 4.75 422,800 6.1 2.78 244,700 1.71
4$.88 - 7.25 428,384 7.1 6.62 70,089 6.85
8$.50 - 12.63 323,500 6.4 9.76 132,351 9.80
--
----------------- ----- ------- -----
$.35 - 12.63 1,580,328 6.1 $4.71 845,884 $2.91
----------------- -------
----------------- -------
</TABLE>
(b) EMPLOYEE STOCK PURCHASE PLAN (ESPP). In 1998, the Company's
shareholders approved the ESPP, under which 300,000 shares of the Company's
Common Stock could be sold to employees. Under its terms employees may elect to
withhold up to 10% of earnings each offering period to purchase the Company's
Common Stock. The purchase price is 85% of the lower of the beginning or the
ending market price for each offering period. Under the ESPP, the Company sold
33,658 shares to employees in 1998.
(c) ACCOUNTING FOR STOCK-BASED COMPENSATION. 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>
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Net Income (Loss):
As Reported............................................................ $ 2,363,384 $ 4,252,181 $ (2,476,359)
Proforma............................................................... 2,244,765 3,815,054 (3,178,395)
Diluted Net Income (Loss) per Share:
As Reported............................................................ $ .24 $ .38 $ (.24)
Proforma............................................................... .23 .35 (.31)
Weighted-average fair value of options granted......................... $ 5.87 $ 4.90 $ 3.77
</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
F-14
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. STOCK COMPENSATION PLANS: (CONTINUED)
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 1996, 1997 and 1998: 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,; 60% for 1997 and 74% for 1998; risk-free interest rates of 6.4%, 6.2%
and 5.5%, respectively; and expected life of 6 years, 6 years and 5.5 years for
1996, 1997 and 1998, respectively.
The fair value of employees' purchase rights under the ESPP, was also
estimated using the Black-Scholes model with the following assumptions for 1998:
dividend yield of 0%; expected volatility of 63% for purchase rights; risk-free
interest rates of 5.1%; and expected life of 1 year. The weighted average fair
value of those purchase rights granted in 1998 was $2.81.
10. 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, 1997 the Company
began matching 25% of employee contributions up to a maximum of 12% of
compensation. The Company's 1997 and 1998 contributions to this plan were
approximately $32,000 and $138,000, respectively.
11. SPECIAL CHARGES:
During the third quarter of 1998, the Company recognized special charges
consisting of the following:
<TABLE>
<S> <C>
Increased provision for doubtful accounts............................. $4,700,000
Exit costs related to Urology Support Services ("USS")................ 2,220,529
Non-strategic program asset write-offs & other restructuring costs.... 1,106,762
Severance costs for workforce reduction............................... 178,315
----------
Special charges....................................................... $8,205,606
----------
----------
</TABLE>
The Company determined that collection costs on certain aged segments of its
accounts receivable outweighed the expected proceeds. Accordingly, a provision
of $4,700,000 was made for the older receivable balances. The Company has taken
steps to implement systems and processing changes intended to improve its
billing procedures and related collections results. As part of the Company's
ongoing assessment of its accounts receivable, additional write-offs may be
necessary that could require additional provision for doubtful accounts.
At the end of the third quarter, the Company made the decision to exit the
USS business to focus management and resources on the Company's core diagnostic
and therapeutic capabilities and opportunities and notified all employees
affected. The exit costs related to this decision of $2,220,529 include
F-15
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. SPECIAL CHARGES: (CONTINUED)
estimated expenses for termination and transition of USS' service contracts,
related asset write-downs and employee severance costs for USS employees. The
costs associated with terminating and transitioning the USS' service contracts
were accrued at $328,747 and the majority of these expenses were paid in the
fourth quarter of 1998. The write-offs for software, start-up costs and other
assets associated with the USS business totaled $1,763,178. Finally, severance
and outplacement costs of $128,604 were recognized for all 14 people employed by
the USS business who were terminated after transitioning the existing service
contracts at the end of October 1998. The majority of these benefits were paid
out in the fourth quarter of 1998. While the Company believes that it has
accrued the estimable expenses associated with this exit of the USS business,
additional or unexpected costs may effect future results of operations.
Also at the end of the third quarter, the Company eliminated 23 positions
across all departments of the Company as part of streamlining the organizational
structure of the Company. The severance and outplacement costs associated with
this workforce reduction totaled $178,315 and were paid during the fourth
quarter of 1998. In addition to the workforce reduction, the Company's
restructuring included the elimination of certain non-strategic programs, which
resulted in asset write-downs principally for research and software assets
totaling $888,741. Other non-recurring costs associated with this restructuring
totaled $218,021.
12. INCOME TAXES:
The Company has provided for income taxes (benefit) as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Current:
Federal....................................................... $ 312,293 $ --
State......................................................... -- --
------------- -------------
Total......................................................... $ 312,293 $ --
Deferred:
Federal....................................................... $ (1,749,465) $ (1,517,769)
State......................................................... -- --
------------- -------------
Total......................................................... (1,749,465) (1,517,769)
------------- -------------
Total income tax benefit........................................ $ (1,437,172) $ (1,517,769)
------------- -------------
------------- -------------
</TABLE>
No income tax benefit or expense was recorded in 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>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Tax expense (benefit) at statutory rates........................... 34% 34% (34%)
State income taxes, less federal income tax effect................. 4% 1% (4%)
Other.............................................................. 4% 3% 0%
Adjustment due to change in valuation allowance.................... (42%) (89%) 0%
-- -- --
Benefit for income taxes........................................... 0% (51%) (38%)
-- -- --
-- -- --
</TABLE>
F-16
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. INCOME TAXES: (CONTINUED)
The Company's income tax provision for 1996 and 1997 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, 1998 will be
limited to approximately $3.7 million, of which approximately $2.9 million,
$100,000 and $700,000 will be available in 1999, 2000 and subsequent years,
respectively.
The tax effects of the temporary differences which gave rise to deferred tax
assets and liabilities at December 31, 1997 and 1998 were:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforward................................... $ 1,156,910 $ 1,451,382
Depreciation and amortization..................................... (38,738) (90,633)
Allowance for doubtful accounts................................... 990,724 2,291,045
Other............................................................. 45,195 7,358
------------ ------------
Net deferred tax asset............................................ $ 2,154,091 $ 3,659,152
Valuation allowance............................................... (324,626) (324,626)
------------ ------------
Total net deferred tax asset.................................... $ 1,829,465 $ 3,334,526
------------ ------------
------------ ------------
</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 and projected operating results for future years.
13. NET INCOME (LOSS) PER SHARE:
A summary of the components of net income (loss) per share and the impact of
dilutive securities is presented below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1996 1997 1998
------------------------------ -------------------------------- ---------------------------------
WEIGHTED PER WEIGHTED WEIGHTED
NET AVERAGE SHARE NET AVERAGE PER SHARE NET AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT LOSS SHARES AMOUNT
---------- --------- -------- ---------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss) Per
Share--Basic.............. $2,363,384 8,731,369 $0.27 $4,252,181 10,203,081 $0.42 $(2,476,359) 10,402,281 $(0.24)
Effect of Dilutive
Securities:
Stock Options........... 820,398 692,779
Warrants................ 279,779 156,680
Net Income (Loss) Per
Share--Assuming
Dilution.................. $2,363,384 9,831,546 $0.24 $4,252,181 11,052,540 $0.38 $(2,476,359) 10,402,281 $(0.24)
</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
F-17
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
13. NET INCOME (LOSS) PER SHARE: (CONTINUED)
because the impact would be antidilutive. Potential shares to be purchased under
such antidilutive stock options totaled 74,150, 367,000 and 592,484 for 1996,
1997 and 1998, respectively. There were no such antidilutive warrants for 1996,
1997 or 1998.
Additionally, for 1998, the otherwise dilutive impact of all other
outstanding stock options and warrants is excluded from the computation of Net
Income Per Share--Assuming Dilution because such impact is antidilutive in the
year of a net loss (i.e., consideration of such shares would result in a lower
Net Loss Per Share--Assuming Dilution in comparison to the Net Loss Per
Share--Basic). For 1998, the otherwise dilutive effect of such antidilutive
stock options and warrants would have been an additional 600,748 and 55,408
weighted average shares, respectively, resulting in a total of 11,058,437
weighted average common and common equivalent shares outstanding, assuming
dilution.
F-18
<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.
<TABLE>
<S> <C> <C>
UROCOR, INC.
(Registrant)
By: /s/ WILLIAM A. HAGSTROM
-----------------------------------------
William A. Hagstrom,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: March 31, 1999.
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board and
/s/ WILLIAM A. HAGSTROM Chief Executive Officer
- ------------------------------ (Principal Executive March 31, 1999
(William A. Hagstrom) Officer)
/s/ MICHAEL N. MCDONALD Chief Financial Officer
- ------------------------------ and Treasurer (Principal March 31, 1999
(Michael N. McDonald) Financial Officer)
/s/ MICHAEL W. GEORGE
- ------------------------------ Director March 31, 1999
(Michael W. George)
/s/ AARON BEAM, JR.
- ------------------------------ Director March 31, 1999
(Aaron Beam, Jr.)
/s/ MICHAEL E. HERBERT
- ------------------------------ Director March 31, 1999
(Michael E. Herbert)
/s/ THOMAS C. RAMEY
- ------------------------------ Director March 31, 1999
(Thomas C. Ramey)
/s/ LOUIS M. SHERWOOD, M.D.
- ------------------------------ Director March 31, 1999
(Louis M. Sherwood, M.D.)
/s/ HERBERT J. CONRAD
- ------------------------------ Director March 31, 1999
(Herbert J. Conrad)
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of UroCor, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of UroCor, Inc. included in this 1998 Annual Report to
Shareholders on Form 10-K and have issued our report thereon dated February 5,
1999. 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, 1998, 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,
February 5, 1999
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(1) ACCOUNTS DEDUCTION(2) BALANCE
- -------------------------------------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1996:
Allowance for Doubtful Accounts..... 982,046 1,296,649 -- (1,155,133) 1,123,562
For the Year Ended December 31, 1997:
Allowance for Doubtful Accounts..... 1,123,562 2,257,666 -- (761,743) 2,619,485
For the Year Ended December 31, 1998:
Allowance for Doubtful Accounts..... 2,619,485 8,409,477 -- (4,999,896) 6,029,066
</TABLE>
- ------------------------
(1) Includes $4,700,000 recorded as a special charge to valuation allowance in
the third quarter of 1998 (see Footnote 11 to the December 31, 1998 audited
financial statements).
(2) Represents write-offs of uncollectible accounts receivable against the
allowance for doubtful accounts.
S-2
<PAGE>
EXHIBIT 10.5
AMENDMENT NO. 3
(DATED FEBRUARY 1, 1999 FOR REFERENCE PURPOSES ONLY)
To Lease Dated April 15, 1994
Between PRESBYTERIAN HEALTH FOUNDATION as Landlord,
and UROCOR, INC. formerly known as CytoDiagnostics, Inc., as Tenant
WHEREAS, Landlord and Tenant are the parties to the above described Lease
for the Building located at 800 N. Research Parkway; and,
Landlord and Tenant mutually desire to amend the above-described lease, (amended
via Amendment No. 1 dated April 14, 1997 and Amendment No. 2 dated April 14,
1998) as follows:
The provisions of this Amendment No. 3 shall supersede and control any
inconsistent provisions contained in the Lease, regardless of whether such
inconsistent provisions are contained in the printed portion of the Lease or any
rider, addendum, amendment or exhibit annexed thereto.
1) Tenant agrees to pay an additional $15,000 per month in Rent for the months
of January through April in the year 1999.
2) Tenant agrees to pay an additional $3,750 per month in Rent for the months
of January through December in the year 2000.
3) The "Inducement" clause of Amendment No. 2 will be deleted in its entirety
and replaced with the following:
"Landlord agrees to reimburse Tenant the depreciated value of previous
Tenant-paid leasehold improvements which will remain in the Building
located at 800 N. Research Parkway."
4) Tenant will pay the cost of architectural services for space planning.
Both parties agree to the terms of the Lease Agreement as amended by Amendment
No. 1, Amendment No. 2 and this Amendment No. 3 and the Lease Agreement shall
continue in full force and effect.
Landlord: Presbyterian Health Foundation
By: /s/ Dennis McGrath Date: 3/15/99
-------------------------------- -------
Dennis McGrath, Vice President
Tenant: UROCOR, INC.
By: /s/ Michael W. George Date: 2/17/99
-------------------------------- -------
Michael W. George
President/Chief Operating Officer
-1-
<PAGE>
EXHIBIT 10.11
[UROCOR, INC. LETTERHEAD]
January 29, 1998
Mr. Karl Nigg
21630 Inglenook Lane
Barrington, IL 60010
Dear Karl:
As follow-up to our conversation earlier this week, UroCor is pleased to extend
you an offer to join the company as Vice-President, UroTherapeutics Business
Development. This position will report directly to me while interacting closely
with Socrates Choumbakos in Corporate Development. Our initial focus will be on
further developing the business plan for the UroTherapeutics Group and
aggressively sourcing additional therapeutics deals from a licensing, co-promote
or acquisition perspective.
Initial base salary will be $150,000.00 paid on a bi-weekly basis. At the
conclusion of 12 months, you will be eligible for a performance and compensation
review. A bonus opportunity of 25% of base salary will be available based on
corporate performance to revenue and operating income objectives as well as,
performance to specific individual objectives. This bonus is paid based on full
year performance and has typically been paid 60 to 90 days will be eligible for
60,000 shares. These shares will vest equally over a 4 year period in 12 month
increments (i.e. 25% per year). The price for these options will be based on
the closing price of UroCor's stock on the day that UroCor's Compensation
Committee approves these options (expected to be in the next 2 - 3 weeks). The
exercise period will be 10 years.
From a re-location perspective, as we discussed, UroCor will make available
$1,000 per month for up to 9 months for temporary living expenses.
Additionally, we will reimburse physical moving expenses and pay for up to 5
trips between Chicago and Oklahoma City (or vice versa). Additionally, UroCor
offers a 401K program with a company match of 25% after 1 year of service.
Further, the company has an incentive stock purchase plan which allows employees
to purchase stock at 15% below market price. The company also has a standard
medical, dental and life insurance program. The details of this plan were
provided to you last week. We also allow 2 weeks vacation 1-5 years employment
and 3 weeks vacation after 6 years.
As with all employees, your employment is "at will", and as such, this offer
does not represent a contract. Your first 90 days of employment are considered
an introductory period. Last, every employee is required to sign a
Confidentiality and Non-Compete Agreement with UroCor at the time of employment.
Karl, I am very excited about the prospect of your joining UroCor and believe
you will make a significant impact in the development and build out of our
UroTherapeutics Group. Please let me know at your earliest convenience what
additional areas we should discuss and a potential start date in February.
If you have questions, please do not hesitate to contact me at (405)290-4101.
Sincerely,
/s/ William A. Hagstrom
William A. Hagstrom
President & CEO
WAH:jr
-1-
<PAGE>
EXHIBIT 10.12
INDEMNITY AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 17th day of February,
1998, between UroCor, Inc., a Delaware corporation (the "Corporation"), and
__________________________ ("Indemnified Party").
WITNESSETH:
WHEREAS, Indemnified Party is, or is about to become, an officer or a
member of the Board of Directors of the Corporation and in such capacity is
performing a valuable service for Corporation;
WHEREAS, Indemnified Party may from time to time serve as a director,
officer, employee, agent or fiduciary of other corporations, partnerships, joint
ventures, trusts or other enterprises, entities or plans at the request of the
Corporation in order to pursue the Corporation's interests;
WHEREAS, the Bylaws (the "Bylaws") of Corporation provide for the mandatory
indemnification of the officers, directors, agents and employees of the
Corporation to the maximum extent authorized by Section 145 of the Delaware
General Corporation Statute, as amended hereafter (the "State Statute");
WHEREAS, such Bylaws and the State Statute specifically provide that they
are not exclusive and thereby contemplate that contracts or other arrangements
not inconsistent with the State Statute may be entered into between the
Corporation and the members of its Board of Directors and its officers with
respect to indemnification of such directors and officers;
WHEREAS, in accordance with the authorization provided by the State
Statute, Corporation has purchased and will maintain a policy of Directors' and
Officers' Liability Insurance ("D&O Insurance"), covering certain liabilities
that may be incurred by its directors and officers in the performance of their
services for Corporation, possibly including certain liabilities for which
indemnification by the Corporation is not authorized or permitted under the
State Statute;
WHEREAS, uncertainties with respect to the terms and availability of D&O
Insurance and with respect to the application, amendment and enforcement of
statutory and by-law indemnification provisions make it desirable to supplement
and enhance the adequacy and reliability of the protection afforded to directors
and officers thereby; and
WHEREAS, to supplement and enhance the protection afforded Indemnified
Party and to induce Indemnified Party to continue to serve as a member of the
Board of Directors or as an officer of the Corporation, the Corporation has
determined and agreed to enter into this Agreement with Indemnified Party, which
has been approved and adopted by the Corporation's Board of Directors;
NOW, THEREFORE, in consideration of Indemnified Party's continued service
as a director or an officer of the Corporation after the date hereof the parties
hereto agree as follows:
A. DEFINITIONS. For purposes of this Agreement:
"Litigation Costs" means costs, charges, expenses and obligations,
including, without limitation, all bonds, expenses of investigation, fees and
expenses of experts, accountants or other professionals, travel and lodging
expenses, court costs, transcript costs, duplicating costs, printing and binding
costs, telephone charges, postage, delivery fees and attorneys' fees, retainers
and expenses, reasonably incurred or contracted for in the investigation,
defense or prosecution of or other involvement in any Proceeding and any appeal
therefrom, and all costs of appeal, attachment, supersedes and other bonds that
may be relevant to any Proceeding.
"Losses" means the total of all amounts which Indemnified Party becomes, or
may become, legally obligated
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<PAGE>
to pay in connection with any Proceeding, including (without limitation)
judgments, penalties, fines, court or investigative costs, amounts paid in
settlement, amounts lost or ordered forfeited pursuant to injunctive
sanctions, and all Litigation Costs.
"Proceeding" means any threatened, pending or completed action, suit,
arbitration, mediation, alternative dispute resolutions mechanism, proceeding,
subpoena compliance, inquiry or investigation, whether civil, criminal,
administrative or investigative (whether external and involving outside parties
or internal to the Corporation, including, but not limited to, an action by or
in the right of the Corporation and any internal investigation conducted by the
Board of Directors or any committee or other designee thereof or any other
person), and whether formal or informal.
2. INDEMNITY OF INDEMNIFIED PARTY. The Corporation hereby agrees to
indemnify Indemnified Party to the fullest extent authorized or permitted by the
provisions of the State Statute, including, but not limited to, (a) the maximum
extent permitted by the provisions of the State Statute which provide that the
State Statute is not the exclusive basis for indemnification of directors and
officers and (b) the maximum extent authorized or permitted by any amendment
thereof or other statutory provision authorizing or permitting such
indemnification which is adopted after the date hereof.
3. ADDITIONAL INDEMNITY. In addition to and not in substitution for or
diminution of the obligations of indemnification set forth in Section 2 hereof,
the Corporation hereby further agrees to indemnify Indemnified Party to the
fullest extent permitted by law against any and all Litigation Costs and Losses
of Indemnified Party in connection with any Proceeding to which Indemnified
Party is, was or at any time becomes a party, or is threatened to be made a
party or otherwise becomes involved (other than as plaintiff except where being
a plaintiff or intervenor is necessary to avoid RES JUDICATA or collateral
estoppel or other estoppel or other result as to matters which may adversely
impact Indemnified Party) by reason of the fact that Indemnified Party is, was
or at any time becomes a director, officer, employee, agent or fiduciary of the
Corporation, or is or was serving or at any time serves at the request of the
Corporation as a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise or any
benefit plan related to the business and affairs of the Corporation, and
specifically including any Proceeding brought pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any other provision under the Exchange Act and the Securities Act of
1933, as amended, and the rules and regulations thereunder.
4. LIMITATIONS ON INDEMNITY. No amounts of Indemnity pursuant to Section
2 or 3 hereof shall be paid by the Corporation:
(a) except to the extent that the aggregate of Litigation Costs and
Losses in any Proceeding or group of related Proceedings to be indemnified
hereunder exceeds the amount of Litigation Costs and Losses for which the
Indemnified Party actually receives indemnification payments or on whose
behalf indemnification payments are made pursuant to any D&O Insurance
policy or from any other source;
(b) on account of any payments required to be paid by an Indemnified
Party as a result of any Proceeding in which a final, non-appealable
judgment is rendered against Indemnified Party for an accounting or
disgorgement of profits made from the purchase or sale by Indemnified Party
of securities of the Corporation pursuant to the provisions of Section
16(b) of the Exchange Act;
(c) on account of Indemnified Party's conduct which is finally
adjudged in any Proceeding to have been knowingly fraudulent, deliberately
dishonest or an act or omission involving willful misconduct; or
(d) if a final non-appealable decision by a court having jurisdiction
over the parties and the subject matter shall determine that such
indemnification is not lawful.
5. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnified Party
is a director, officer, employee, agent or fiduciary of the Corporation (or is
or was serving at the request of the Corporation as a director, officer,
employee, agent or fiduciary of another corporation, partnership, joint venture,
trust or other enterprise or any benefit plan related to the business and
affairs of the Corporation or of any of its affiliates, subsidiaries, associates
or other entities in which it is interested) and shall
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<PAGE>
continue thereafter so long as Indemnified Party shall be subject to any
possible Litigation Costs or Losses in any Proceeding by reason of the fact
that Indemnified Party was a director, officer, employee, agent or fiduciary
of the Corporation (or is or was serving at the request of the Corporation as
a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise or any such benefit
plan).
6. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by
Indemnified Party of notice of the commencement of any Proceeding, Indemnified
Party shall, if a claim in respect thereof is to be made against the Corporation
under this Agreement, give written notice to the Corporation of the commencement
thereof as promptly as practicable; but the omission so to notify the
Corporation will not relieve the Corporation from any liability that it may have
to Indemnified Party unless the Corporation can demonstrate by clear and
convincing evidence that it was materially prejudiced by the failure to receive
such notice. With respect to any such Proceeding as to which Indemnified Party
becomes involved:
(a) the Corporation will be entitled to participate therein at its
own expense;
(b) except as otherwise provided below, to the extent that it may
wish, the Corporation may, jointly with any other indemnifying party,
assume the defense thereof, with outside counsel that must be reasonably
satisfactory to Indemnified Party. After notice from the Corporation to
Indemnified Party of its election so to assume the defense thereof (and
consent of Indemnified Party as to the Corporation's choice of outside
counsel, which consent will not be unreasonably withheld), the Corporation
will be liable to Indemnified Party under this Agreement for all Litigation
Costs (subject to Section 4 above and other than as provided below with
respect to attorneys' fees) incurred in connection therewith. Indemnified
Party shall have the right to employ personal counsel in such Proceeding,
but the fees and expenses of such counsel incurred after notice from the
Corporation of its assumption of the defense thereof (and consent of
Indemnified Party as to the Corporation's choice of outside counsel) shall
be at the expense of Indemnified Party, unless (i) the employment of
counsel for Indemnified Party has been authorized by the Corporation, (ii)
Indemnified Party shall have concluded in good faith that there may be a
conflict of interest between the Corporation and Indemnified Party in the
conduct of the defense (or part of the defense) of such action, or
(iii) the Corporation in fact shall not have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
counsel shall be at the expense of the Corporation. The Corporation shall
not be entitled to assume the defense of any Proceeding brought by or on
behalf of the Corporation or as to which Indemnified Party shall have made
the conclusion provided for in clause (ii) of this Section 6(b); and
(c) the Corporation shall not be liable to indemnify Indemnified
Party under this Agreement for any Losses paid in settlement of any
Proceeding or claim effected without its written consent. The Corporation
shall not settle any Proceeding or claim in any manner that would impose
any penalty, sanction or limitation on Indemnified Party, or otherwise
effectively indicate the existence of any wrongful act by Indemnified
Party, without Indemnified Party's written consent. Neither the
Corporation nor Indemnified Party shall unreasonably withhold its consent
to any proposed settlement. Without intending to limit the circumstances
in which it would be unreasonable for the Corporation to withhold its
consent to a settlement, the parties hereto agree it would be unreasonable
for the Corporation to withhold its consent to a settlement in an amount
that did not exceed, in the business judgment of the Board of Directors of
the Corporation, the estimated amount of Litigation Costs of Indemnified
Party to litigate the Proceeding to conclusion, provided that there is no
other materially adverse consequence to the Corporation from such
settlement.
7. NO PRESUMPTIONS. The termination of any Proceeding by judgment,
order, settlement, conviction or upon a plea of NOLO CONTENDERE or its
equivalent, shall not, of itself, create a presumption that (a) Indemnified
Party did not act in good faith, (b) with respect to any criminal action or
proceeding, Indemnified Party had reasonable cause to believe that his or her
conduct constituted a criminal violation or (c) Indemnified Party was knowingly
fraudulent, deliberately dishonest or committed an act, or made an omission,
involving willful misconduct.
8. MANDATORY ADVANCEMENT OF EXPENSES. At the request of Indemnified
Party, Litigation Costs incurred or contracted for by him or her in any
Proceeding shall be paid by the Corporation on a continuing and current basis,
in advance of the final disposition of such matter, with the undertaking which
Indemnified Party makes hereby
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<PAGE>
that if it shall be ultimately determined that Indemnified Party was not
entitled to be indemnified therefor, or was not entitled to be fully
indemnified therefor, Indemnified Party shall repay to the Corporation the
amount, or appropriate portion thereof, so advanced. Such advancement and
current payment of Litigation Costs by the Corporation shall be made promptly
(but in any event within 10 days) after receipt by the Corporation of
Indemnified Party's request therefor.
9. REPAYMENT OF EXPENSES. Indemnified Party agrees that Indemnified
Party will reimburse the Corporation for all Litigation Costs paid by the
Corporation in connection with any Proceeding in which Indemnified Party is
involved in the event and only to the extent that it shall be ultimately
determined by final non-appealable judgment of a court of competent jurisdiction
that Indemnified Party is not entitled to be indemnified by the Corporation for
such Litigation Costs under the provisions of the State Statute, the Bylaws and
this Agreement.
10. PROCEDURE.
(a) Indemnification hereunder shall be made promptly and in any event
within 30 days of Indemnified Party's written request therefor, unless (i)
an affirmative determination is made reasonably and within such 30-day
period by the Corporation in the manner provided in Section 10(b) below
that Indemnified Party is not entitled to indemnity hereunder for any
reason other than as contemplated by clause (ii) of this Section 10(a), or
(ii) an affirmative determination is required by the State Statute or other
applicable law that the Indemnified Party met an applicable standard of
conduct, in which case the Corporation will cause such determination to be
made within 60 days from the date of the written request for indemnity.
(b) The determination to be made by the Corporation under Section
10(a) above shall be based on the facts known at the time and shall be made
(i) by the Board of Directors of the Corporation, by a majority vote of a
quorum consisting of directors who are not parties to the Proceeding
("disinterested directors"), or (ii) if such a quorum is not obtainable, by
independent legal counsel in a written opinion, or (iii) even if such a
quorum is obtainable, by independent legal counsel in a written opinion if
the Board of Directors of the Corporation, by a majority vote of a quorum
consisting of disinterested directors, so directs, or (iv) by the
stockholders of the Corporation. Any such determination may be contested
by Indemnified Party as hereinafter contemplated.
(c) A failure to make any required determination within the period of
time specified shall be deemed to be a determination favorable to the
Indemnified Party.
11. ENFORCEMENT.
(a) The Corporation expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on the Corporation
hereby and has obtained the approval of its Board of Directors to induce
Indemnified Party to serve or continue serving as a director or an officer
of Corporation and acknowledges that Indemnified Party is relying upon this
Agreement in agreeing to serve or continue serving in such capacity.
(b) In the event Indemnified Party is required to bring any action to
enforce rights or to collect moneys due under this Agreement, the
Corporation shall reimburse Indemnified Party, on a continuing and current
basis, for all of Indemnified Party's reasonable fees and expenses in
bringing and pursuing such action and Indemnified Party shall have no
obligation to reimburse the Corporation therefor unless Indemnified Party
is not successful in such action after rendition of a final, non-appealable
judgment by a court of competent jurisdiction.
(c) The right to indemnification hereunder shall be enforceable by
Indemnified Party in any court of competent jurisdiction if Indemnified
Party's claim therefor is denied, in whole or in part, in the manner
provided herein, or if no disposition of such claim is made within 60 days
from the receipt by the Corporation of Indemnified Party's request for
indemnification hereunder.
12. SEVERABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and
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<PAGE>
independent of the others so that if any provision hereof shall be held to be
invalid or unenforceable for any reason, such invalidity or unenforceability
shall not affect the validity or enforceability of the other provisions
hereof. To the extent necessary to give effect to this Agreement, should any
provision hereof be held invalid or unenforceable, this Agreement shall be
reformed in such a manner as to provide the maximum indemnity contemplated
hereby to Indemnified Party, it being the intention of the parties hereto
that this Agreement be otherwise given its maximum effect consistent with the
laws and, to the extent applicable, public policies of the State of Delaware.
13. OBLIGATION TO AMEND. The Corporation agrees to take all actions
necessary to amend this Agreement in the future to increase or otherwise
maximize the indemnity protections intended to be afforded hereby to the extent
then permitted by law.
14. NOTICE. Any notice, request or other communication hereunder to the
Corporation or Indemnified Party shall be in writing and delivered or sent by
postage prepaid first class mail or by hand delivery or express mail service or
by facsimile transmission as follows: (a) if to the Corporation, addressed to
UroCor, Inc., 800 Research Parkway, Oklahoma City, Oklahoma 73104, facsimile
405/290-4150, and (b) if to Indemnified Party, to the address shown on the
signature page hereof or to such other address as Indemnified Party shall
designate from time to time to the Corporation in writing.
15. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION.
(a) This Agreement shall be interpreted and enforced in accordance
with the laws of the State of Delaware.
(b) This Agreement shall be binding upon Indemnified Party and upon
the Corporation, its successors and assigns, and shall inure to the benefit
of Indemnified Party, his or her heirs, personal representatives and
assigns and to the benefit of the Corporation, its successors and assigns.
The Corporation shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or any substantial
part of the business or assets of the Corporation, by agreement in form and
substance satisfactory to Indemnified Party, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that
the Corporation would be required to perform it if no such succession had
taken place. Failure of the Corporation to obtain such agreement prior to
effectiveness of any succession shall be a breach of this Agreement and
shall entitle Indemnified Party to appropriate equitable relief or monetary
damages from the Corporation in an amount necessary to provide Indemnified
Party with the protections to which he or she would be entitled hereunder.
As used in this Agreement, the "Corporation" shall mean the Corporation as
hereinbefore defined and any successor to its business or assets as
aforesaid that executes and delivers the agreement provided for by this
Section 15(b) or that otherwise becomes bound by all of the terms and
provisions of this Agreement by operation of law.
(c) No amendment, modification, termination or cancellation of this
Agreement shall be effective unless in writing signed by both parties
hereto.
16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding between the parties relating to the subject matter hereof and
supersedes all prior agreements between the parties relating to the subject
matter hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
UroCor, Inc.
By:
---------------------------------------
William A. Hagstrom
President and Chief
Executive Officer
[Name of Indemnified Party]
-------------------------------------------
Address:
----------------------------------
----------------------------------
----------------------------------
Facsimile:
--------------------------------
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<PAGE>
SCHEDULE 10.12
INDEMNITY AGREEMENTS
CURRENT BOARD MEMBERS
Herbert J. Conrad Louis M. Sherwood, M.D.
Michael E. Herbert Aaron Beam, Jr.
Thomas C. Ramey
CURRENT EMPLOYEES
William A. Hagstrom Socrates H. Choumbakos
Robert W. Veltri, Ph.D. Mark G. Dimitroff
Karl K. Nigg Michael N. McDonald
Lou Rye Carmichael Gerard O'Dowd
Larry S. Compton Michael W. George
PAST BOARD MEMBERS
Paul A. Brown, M.D.
FORMER EMPLOYEES
Kathryn L.W. Ingerly
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<PAGE>
EXHIBIT 10.13
UROCOR, INC.
1998 Management Incentive Compensation Plan
- - 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 10.18
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT between UroCor, Inc., a Delaware corporation (the
"Company"), and _______________________________________ (the "Employee") is
effective as of this 21st day of October, 1998 (the "Effective Date"). Certain
capitalized terms used herein are defined in Section 21.
W I T N E S S E T H:
WHEREAS, the Company considers it to be in the best interests of its
stockholders to encourage the continued employment of certain key employees of
the Company notwithstanding the possibility, threat or occurrence of a Change in
Control of the Company; and
WHEREAS, the Employee is a key employee of the Company; and
WHEREAS, the Company believes that the possibility of the occurrence of a
Change in Control of the Company may result in the termination by the Employee
of the Employee's employment by the Company or in the distraction of the
Employee from the performance of his duties to the Company, in either case to
the detriment of the Company and its stockholders; and
WHEREAS, the Company recognizes that the Employee could suffer adverse
financial and professional consequences if a Change in Control of the Company
were to occur; and
WHEREAS, the Company wishes to enter into this Agreement to protect the
Employee if a Change in Control of the Company occurs, thereby encouraging the
Employee to remain in the employ of the Company and not to be distracted from
the performance of his duties to the Company by the possibility of a Change in
Control of the Company;
NOW, THEREFORE, the parties agree as follows:
SECTION 2. OTHER EMPLOYMENT ARRANGEMENTS.
(a) This Agreement does not affect the Employee's existing or future
employment arrangements with the Company unless a Change in Control of the
Company shall have occurred before the expiration of the term of this
Agreement. The Employee's employment with the Company shall continue to be
governed by the Employee's existing or future employment agreements with the
Company, if any, or, in the absence of any employment agreement, shall
continue to be at the will of the Board of Directors or, if the Employee is
not an officer of the Company at the time of the termination of the
Employee's employment with the Company, the will of the Chief Executive
Officer of the Company, except that if (I) a Change in Control of the Company
shall have occurred before the expiration of the term of this Agreement and
(ii) the Employee's employment with the Company is terminated (whether by the
Employee or the Company or automatically as provided in Section 3) after the
occurrence of that Change in Control of the Company, then the Employee shall
be entitled to receive certain benefits as provided in this Agreement.
(b) Notwithstanding anything contained in this Agreement to the contrary,
if following the commencement of any discussions with any person that ultimately
results in a Change in Control of the Company, (I) the Employee's employment
with the Company is terminated, (ii) the Employee is removed from any material
duties or position with the Company, (iii) the Employee's Base Salary is reduced
or (iv) the Employee's annual bonus is reduced to an amount less than the
Benchmark Bonus, then for all purposes of this Agreement, such Change in Control
of the Company shall be deemed to have occurred on the date immediately prior to
the date of such termination, removal or reduction.
(c) Nothing in this Agreement shall prevent or limit the Employee's
continuing or future participation in any plan, program, policy or practice of
or provided by the Company or any of its Affiliates and for which the Employee
may qualify, nor shall anything herein limit or otherwise affect such rights as
the Employee may have under any contract or agreement with the Company or any of
its Affiliates. Amounts which are vested benefits or
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which the Employee is otherwise entitled to receive under any plan, program,
policy or practice of or provided by, or any contract or agreement with, the
Company or any of its Affiliates at or subsequent to the date of termination
of the Employee's employment with the Company shall be payable or otherwise
provided in accordance with such plan, program, policy or practice or
contract or agreement except as explicitly modified by this Agreement.
SECTION 3. CHANGE IN CONTROL OF THE COMPANY. A "Change in Control of
the Company" shall have occurred if, after the Effective Date:
(i) a report on Schedule 13D or Schedule 14D-1 (or any successor
schedule, form or report) shall be filed with the Commission pursuant to
the Exchange Act and that report discloses that any person (within the
meaning of Section 13(d) or Section 14(d)(2) of the Exchange Act), other
than the Company (or one of its subsidiaries) or any employee benefit plan
sponsored by the Company (or one of its subsidiaries), is the beneficial
owner (as that term is defined in Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act), directly or indirectly, of
20 percent or more of the outstanding Voting Stock;
(ii) any person (within the meaning of Section 13(d) or Section
14(d)(2) of the Exchange Act), other than the Company (or one of its
subsidiaries) or any employee benefit plan sponsored by the Company (or one
of its subsidiaries), shall purchase securities pursuant to a tender offer
or exchange offer to acquire any Voting Stock (or any securities
convertible into Voting Stock) and, immediately after consummation of that
purchase, that person is the beneficial owner (as that term is defined in
Rule 13d-3 or any successor rule or regulation promulgated under the
Exchange Act), directly or indirectly, of 20 percent or more of the
outstanding Voting Stock (such person's beneficial ownership to be
determined, in the case of rights to acquire Voting Stock, pursuant to
paragraph (d) of Rule 13d-3 or any successor rule or regulation promulgated
under the Exchange Act);
(iii) the consummation of:
(x) a merger, stock exchange, consolidation or
reorganization of the Company with or into any
other person if as a result of such merger, stock
exchange, consolidation or reorganization, 50
percent or less of the combined voting power of
the then-outstanding securities of such other
person immediately after such merger, stock
exchange, consolidation or reorganization are held
in the aggregate by the holders of Voting Stock
immediately prior to such merger, consolidation or
reorganization;
(y) any sale, lease, exchange or other transfer of all
or substantially all the assets of the Company and
its consolidated subsidiaries to any other person
if as a result of such sale, lease, exchange or
other transfer, 50 percent or less of the combined
voting power of the then-outstanding securities of
such other person immediately after such sale,
lease, exchange or other transfer are held in the
aggregate by the holders of Voting Stock
immediately prior to such sale, lease, exchange or
other transfer; or
(z) a transaction immediately after the consummation
of which any person (within the meaning of Section
13(d) or Section 14(d)(2) of the Exchange Act)
would be the beneficial owner (as that term is
defined in Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act),
directly or indirectly, of more than 50 percent of
the outstanding Voting Stock;
(iv) the stockholders of the Company approve the dissolution of the
Company; or
(v) during any period of 12 consecutive months, the individuals who
at the
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beginning of that period constituted the Board of Directors shall
cease to constitute a majority of the Board of Directors, unless the
election, or the nomination for election by the Company's stockholders, of
each director of the Company first elected during such period was approved
by a vote of at least a two-thirds of the directors of the Company then
still in office who were directors of the Company at the beginning of any
such period.
SECTION 4. TERM OF THIS AGREEMENT. The term of this Agreement shall begin
on the Effective Date and shall expire on the first to occur of:
(i) the Employee's death, the Employee's Disability or the
Employee's Retirement, which events shall also be deemed automatically to
terminate the Employee's employment by the Company; or
(ii) the termination by the Employee or the Company of the
Employee's employment by the Company.
The expiration of the term of this Agreement shall not terminate this Agreement
itself or affect the right of the Employee or the Employee's legal
representatives to enforce the payment of any amount or other benefit to which
the Employee was entitled before the expiration of the term of this Agreement or
to which the Employee became entitled as a result of the event (including the
termination, whether by the Employee or the Company or automatically as provided
in this Section 3, of the Employee's employment by the Company) that caused the
term of this Agreement to expire.
SECTION 5. EVENT OF TERMINATION FOR CAUSE. An "Event of Termination for
Cause" shall have occurred if, after a Change in Control of the Company, the
Employee shall have committed:
(i) gross negligence or willful misconduct in connection with his
duties or in the course of his employment with the Company;
(ii) an act of fraud, embezzlement or theft in connection with his
duties or in the course of his employment with the Company;
(iii) intentional wrongful damage to property of the Company;
(iv) intentional wrongful disclosure of secret processes or
confidential information of the Company; or
(v) an act leading to a conviction of a felony or a misdemeanor
involving moral turpitude.
For purposes of this Agreement, no act, or failure to act, on the part of the
Employee shall be deemed "intentional" if it was due primarily to an error in
judgment or negligence, but shall be deemed "intentional" only if done, or
omitted to be done, by the Employee not in good faith and without reasonable
belief that his action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated as a result of an "Event of Termination for Cause" hereunder unless
and until there shall have been delivered to the Employee a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
Board of Directors then in office at a meeting of the Board of Directors called
and held for such purpose (after reasonable notice to the Employee and an
opportunity for the Employee, together with his counsel, to be heard before the
Board of Directors), finding that, in the good faith opinion of the Board of
Directors, the Employee had committed an act set forth above in this Section 4
and specifying the particulars thereof in detail. Nothing herein shall limit
the right of the Employee or his legal representatives to contest the validity
or propriety of any such determination.
SECTION 6. AN EVENT OF TERMINATION FOR GOOD REASON. An "Event of
Termination for Good Reason" shall have occurred if, after a Change in Control
of the Company, the Company shall:
(i) assign to the Employee any duties inconsistent with the
Employee's position (including offices, titles and reporting requirements),
authority, duties or responsibilities with the
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Company in effect immediately before the occurrence of the first Change in
Control of the Company or otherwise make any change in any such position,
authority, duties or responsibilities;
(ii) remove the Employee from, or fail to re-elect or appoint the
Employee to, any duties or position with the Company or any of its
Affiliates that were assigned or held by the Employee immediately before
the occurrence of the first Change in Control of the Company, except that a
nominal change in the Employee's title that is merely descriptive and does
not affect rank or status shall not constitute such an event;
(iii) take any other action that results in a material diminution in
such position, authority, duties or responsibilities or otherwise take any
action that materially interferes therewith;
(iv) reduce the Employee's annual base salary as in effect
immediately before the occurrence of the first Change in Control of the
Company or as the Employee's annual base salary may be increased from time
to time after that occurrence (the "Base Salary");
(v) reduce the Employee's annual bonus to an amount less than ___%
of the Employee's Base Salary (the "Benchmark Bonus");
(vi) relocate the Employee's principal office outside of the
metropolitan area of Oklahoma City, Oklahoma;
(vii) fail to (x) continue in effect any bonus, incentive, profit
sharing, performance, savings, retirement or pension policy, plan, program
or arrangement (such policies, plans, programs and arrangements
collectively being referred to herein as "Basic Benefit Plans"), including,
but not limited to, any deferred compensation, supplemental executive
retirement or other retirement income, stock option, stock purchase, stock
appreciation, or similar policy, plan, program or arrangement of the
Company, in which the Employee was a participant immediately before the
occurrence of the first Change in Control of the Company, or any substitute
plan adopted by the Board of Directors and in which the Employee was a
participant immediately before the occurrence of the last Change in Control
of the Company, unless an equitable and reasonably comparable arrangement
(embodied in a substitute or alternative benefit or plan) shall have been
made with respect to such Basic Benefit Plan promptly following the
occurrence of the last Change in Control of the Company, or (y) continue
the Employee's participation in any Basic Benefit Plan (or any substitute
or alternative plan) on substantially the same basis, both in terms of the
amount of benefits provided to the Employee (which are in any event always
subject to the terms of any applicable Basic Benefit Plan) and the level of
the Employee's participation relative to other participants, as existed
immediately before the occurrence of the first Change in Control of the
Company;
(viii) fail to continue to provide the Employee with benefits
substantially similar to those enjoyed by the Employee under any of the
Company's other employee benefit plans, policies, programs and arrangements
(the "Other Benefit Plans"), including, but not limited to, life insurance,
medical, dental, health, hospital, accident or disability plans, in which
the Employee was a participant immediately before the occurrence of the
first Change in Control of the Company;
(ix) take any action that would directly or indirectly materially
reduce any other non-contractual benefits that were provided to the
Employee by the Company immediately before the occurrence of the first
Change in Control of the Company or deprive the Employee of any material
fringe benefit enjoyed by the Employee immediately before the occurrence of
the first Change in Control of the Company;
(x) fail to provide the Employee with the number of paid vacation
days to which the Employee was entitled in accordance with the Company's
vacation policy in effect immediately before the occurrence of the first
Change in Control of the Company;
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(xi) fail to continue to provide Employee with office space,
related facilities and support personnel (including, but not limited to,
administrative and secretarial assistance) (y) that are both commensurate
with Employee's responsibilities to and position with the Company
immediately before the occurrence of the first Change in Control of the
Company and not materially dissimilar to the office space, related
facilities and support personnel provided to other employees of the Company
having comparable responsibility to the Employee, or (z) that are
physically located at the Company's principal executive offices;
(xii) require the Employee to perform a majority of his duties
outside the Company's principal executive offices for a period of more than
21 consecutive days or for more than 90 days in any calendar year;
(xiii) fail to honor any provision of any employment agreement
Employee has or may in the future have with the Company or fail to honor
any provision of this Agreement;
(xiv) give effective notice of an election to terminate at the end of
the term or extended the term of any employment agreement Employee has or
may in the future have with the Company in accordance with the terms of any
such agreement; or
(xv) purport to terminate the Employee's employment by the Company
unless notice of that termination shall have been given to the Employee
pursuant to, and that notice shall meet the requirements of, Section 6.
SECTION 7. NOTICE OF TERMINATION. If a Change in Control of the Company
shall have occurred before the expiration of the term of this Agreement, any
subsequent termination by the Employee or the Company of the Employee's
employment by the Company, or any determination of the Employee's Disability,
shall be communicated by notice to the other party that shall indicate the
specific paragraph of Section 7 pursuant to which the Employee is to receive
benefits as a result of the termination. If the notice states that the
Employee's employment by the Company has been automatically terminated as a
result of the Employee's Disability, the notice shall (I) specifically describe
the basis for the determination of the Employee's Disability, and (ii) state the
date of the determination of the Employee's Disability, which date shall be not
more than ten (10) days before the date such notice is given. If the notice is
from the Company and states that the Employee's employment by the Company is
terminated by the Company as a result of the occurrence of an Event of
Termination for Cause, the notice shall specifically describe the action or
inaction of the Employee that the Company believes constitutes an Event of
Termination for Cause and shall be accompanied by a copy of the resolution
satisfying Section 4. If the notice is from the Employee and states that the
Employee's employment by the Company is terminated by the Employee as a result
of the occurrence of an Event of Termination for Good Reason, the notice shall
specifically describe the action or inaction of the Company that the Employee
believes constitutes an Event of Termination for Good Reason. Each notice given
pursuant to this Section 6 (other than a notice stating that the Employee's
employment by the Company has been automatically terminated as a result of the
Employee's Disability) shall state a date, which shall be not fewer than thirty
(30) days nor more than sixty (60) days after the date such notice is given, on
which the termination of the Employee's employment by the Company is effective.
The date so stated in accordance with this Section 6 shall be the "Termination
Date". If a Change in Control of the Company shall have occurred before the
expiration of the term of this Agreement, any subsequent purported termination
by the Company of the Employee's employment by the Company, or any subsequent
purported determination by the Company of the Employee's Disability, shall be
ineffective unless that termination or determination shall have been
communicated by the Company to the Employee by notice that meets the
requirements of the foregoing provisions of this Section 6 and the provisions of
Section 9.
SECTION 8. BENEFITS PAYABLE ON CHANGE IN CONTROL AND TERMINATION. (a) If
(x) a Change in Control of the Company shall have occurred before the expiration
of the term of this Agreement, and (y) the Employee's employment by the Company
is terminated (whether by the Employee or the Company or automatically as
provided in Section 3) after the occurrence of that Change in Control of the
Company, the Employee shall be entitled to the following benefits:
(i) If the Employee's employment by the Company is terminated (x)
by the Company as a result of the occurrence of an Event of Termination for
Cause, or (y) by the
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Employee before the occurrence of an Event of Termination for Good
Reason, then the Company shall pay to the Employee the Base Salary
accrued through the Termination Date but not previously paid to the
Employee, and the Employee shall be entitled to any other amounts or
benefits provided under any plan, policy, practice, program, contract
or arrangement of or with the Company, including, but not limited to,
the Basic Benefit Plans and the Other Benefit Plans, which shall be
governed by the terms thereof (except as explicitly modified by this
Agreement).
(ii) If the Employee's employment by the Company is automatically
terminated as a result of the Employee's death, the Employee's Disability
or the Employee's Retirement, then (x) the Company shall pay to the
Employee the Base Salary accrued through the date of the occurrence of that
event but not previously paid to the Employee, and (y) the Employee shall
be entitled to any other amounts or benefits provided under any plan,
policy, practice, program, contract or arrangement of or with the Company,
including, but not limited to, the Basic Benefit Plans and the Other
Benefit Plans, which shall be governed by the terms thereof (except as
explicitly modified by this Agreement).
(iii) If the Employee's employment by the Company is terminated (x)
by the Company otherwise than as a result of the occurrence of an Event of
Termination for Cause, or (y) by the Employee after the occurrence of an
Event of Termination for Good Reason, then the Employee shall be entitled
to the following:
(1) the Company shall pay to the Employee the Base Salary
and compensation for earned but unused vacation time accrued through
the Termination Date but not previously paid to the Employee;
(2) the Company shall pay to the Employee an amount equal
to the product of (A) the highest aggregate annual bonus, incentive or
other payment of cash compensation in addition to annual base salary
pursuant to any bonus, incentive, profit-sharing, performance,
discretionary pay or similar policy, plan, program or arrangement of
the Company ("Incentive Pay") paid or payable to the Executive
(including any deferred portion thereof) for any fiscal year (or
portion thereof) of the Company ending after the Effective Date (the
"Highest Bonus"), and (B) a fraction, the numerator of which is the
number of days in the current fiscal year of the Company through the
Date of Termination and the denominator of which is 365;
(3) the Company shall pay to the Employee, as a lump sum,
an amount (the "Severance Payment") equal to one and one-half (1 1/2)
times the sum of:
(A) the amount (including any deferred portion thereof) of
the Base Salary that would have been paid to the Employee
during the fiscal year of the Company in which the Termination
Date occurs based on the assumption that the Employee's
employment by the Company had continued throughout that fiscal
year at the Base Salary at the highest rate in effect at any
time during the term of this Agreement; plus
(B) the amount of the Highest Bonus;
(4) the Company (at its sole expense) shall take the
following actions:
(A) throughout the Relevant Period, the Company shall
maintain in effect, and not materially reduce the benefits
provided by, each of the Other Benefit Plans in which the
Employee was a participant immediately before the
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Termination Date; and
(B) the Company shall arrange for the Employee's
uninterrupted participation throughout the Relevant Period in
each of such Other Benefit Plans,
PROVIDED that if the Employee's participation after the Termination
Date in any such Other Benefit Plan is not permitted by the terms of
that Other Benefit Plan, then throughout the Relevant Period, the
Company (at its sole expense) shall provide the Employee with
substantially the same benefits that were provided to the Employee by
that Other Benefit Plan immediately before the Termination Date; and
(5) the Employee shall be entitled to any other amounts or
benefits provided under any plan, policy, practice, program, contract
or arrangement of or with the Company, including, but not limited to,
the Basic Benefit Plans and the Other Benefit Plans, which shall be
governed by the terms thereof (except as explicitly modified by this
Agreement).
(b) Each payment required to be made to the Employee pursuant to the
foregoing provisions of this Section 7(a) above (I) shall be made by check drawn
on an account of the Company at a bank located in the United States of America,
and (ii) shall be paid (x) if the Employee's employment by the Company was
terminated as a result of the Employee's death, the Employee's Disability or the
Employee's Retirement, not more than thirty (30) days immediately following the
date of the occurrence of that event, and (y) if the Employee's employment by
the Company was terminated for any other reason, not more than ten (10) days
immediately following the Termination Date.
SECTION 9. SUCCESSORS. If a Change in Control of the Company shall have
occurred before the expiration of the term of this Agreement,
(i) the Company shall not, directly or indirectly, consolidate
with, merge into or sell or otherwise transfer its assets as an entirety or
substantially as an entirety to, any person, or permit any person to
consolidate with or merge into the Company, unless immediately after such
consolidation, merger, sale or transfer, the Successor shall have assumed
in writing the Company's obligations under this Agreement; and
(ii) not fewer than ten (10) days before the consummation of any
consolidation of the Company with, merger by the Company into, or sale or
other transfer by the Company of its assets as an entirety or substantially
as an entirety to, any person, the Company shall give the Employee notice
of that proposed transaction.
SECTION 10. NOTICE. Notices required or permitted to be given by either
party pursuant to this Agreement shall be in writing and shall be deemed to have
been given when delivered personally to the other party or when deposited with
the United States Postal Service as certified or registered mail with postage
prepaid and addressed:
(i) if to the Employee, at the Employee's address last shown on the
Company's records, and
(ii) if to the Company, at 800 Research Parkway, Oklahoma City,
Oklahoma 73104, directed to the attention of the Company's President.
Or, in either case, to such other address as the party to whom or which such
notice is to be given shall have specified by notice given to the other party.
SECTION 11. WITHHOLDING TAXES. The Company may withhold from all payments
to be paid to the Employee pursuant to this Agreement all taxes that, by
applicable federal or state law, the Company is required to
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so withhold.
SECTION 12. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by, or benefit
from, the Company or any of its Affiliates to or for the benefit of the
Employee, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (any such payments, distributions or
benefits being individually referred to herein as a "Payment," and any two or
more of such payments, distributions or benefits being referred to herein as
"Payments"), would be subject to the excise tax imposed by Section 4999 of the
Code (such excise tax, together with any interest thereon, any penalties,
additions to tax, or additional amounts with respect to such excise tax, and any
interest in respect of such penalties, additions to tax or additional amounts,
being collectively referred herein to as the "Excise Tax"), then the Employee
shall be entitled to receive an additional payment or payments (individually
referred to herein as a "Gross-Up Payment" and any two or more of such
additional payments being referred to herein as "Gross-Up Payments") in an
amount such that after payment by the Employee of all taxes (as defined in
Section 11(k)) imposed upon the Gross-Up Payment, the Employee retains an amount
of such Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 11-C- through (I), any
determination (individually, a "Determination") required to be made under this
Section 11(b), including whether a Gross-Up Payment is required and the amount
of such Gross-Up Payment, shall initially be made, at the Company's expense, by
nationally recognized tax counsel mutually acceptable to the Company and the
Employee ("Tax Counsel"). Tax Counsel shall provide detailed supporting legal
authorities, calculations, and documentation both to the Company and the
Employee within 15 business days of the termination of the Employee's
employment, if applicable, or such other time or times as is reasonably
requested by the Company or the Employee. If Tax Counsel makes the initial
Determination that no Excise Tax is payable by the Employee with respect to a
Payment or Payments, it shall furnish the Employee with an opinion reasonably
acceptable to the Employee that no Excise Tax will be imposed with respect to
any such Payment or Payments. The Employee shall have the right to dispute any
Determination (a "Dispute") within 15 business days after delivery of Tax
Counsel's opinion with respect to such Determination. The Gross-Up Payment, if
any, as determined pursuant to such Determination shall, at the Company's
expense, be paid by the Company to the Employee within five business days of the
Employee's receipt of such Determination. The existence of a Dispute shall not
in any way affect the Employee's right to receive the Gross-Up Payment in
accordance with such Determination. If there is no Dispute, such Determination
shall be binding, final and conclusive upon the Company and the Employee,
subject in all respects, however, to the provisions of Section 11-C- through (I)
below. As a result of the uncertainty in the application of Sections 4999 and
280G of the Code, it is possible that Gross-Up Payments (or portions thereof)
which will not have been made by the Company should have been made
("Underpayment"), and if upon any reasonable written request from the Employee
or the Company to Tax Counsel, or upon Tax Counsel's own initiative, Tax
Counsel, at the Company's expense, thereafter determines that the Employee is
required to make a payment of any Excise Tax or any additional Excise Tax, as
the case may be, Tax Counsel shall, at the Company's expense, determine the
amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to the Employee.
-C- The Company shall defend, hold harmless, and indemnify the
Employee on a fully grossed-up after tax basis from and against any and
all claims, losses, liabilities, obligations, damages, impositions,
assessments, demands, judgements, settlements, costs and expenses
(including reasonable attorneys', accountants', and experts' fees and
expenses) with respect to any tax liability of the Employee resulting
from any Final Determination (as defined in Section 11(j)) that any
Payment is subject to the Excise Tax.
(c) If a party hereto receives any written or oral communication with
respect to any question, adjustment, assessment or pending or threatened audit,
examination, investigation or administrative, court or other proceeding which,
if pursued successfully, could result in or give rise to a claim by the Employee
against the Company under this Section 11 ("Claim"), including, but not limited
to, a claim for indemnification of the Employee by the Company under
Section 11-C-, then such party shall promptly notify the other party hereto in
writing of such Claim ("Tax Claim Notice").
(d) If a Claim is asserted against the Employee ("Employee Claim"), the
Employee shall take or cause to be taken such action in connection with
contesting such Employee Claim as the Company shall reasonably request in
writing from time to time, including the retention of counsel and experts as are
reasonably designated by
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the Company (it being understood and agreed by the parties hereto that the
terms of any such retention shall expressly provide that the Company shall be
solely responsible for the payment of any and all fees and disbursements of
such counsel and any experts) and the execution of powers of attorney,
PROVIDED that:
(i) within 30 calendar days after the Company receives or delivers,
as the case may be, the Tax Claim Notice relating to such Employee Claim
(or such earlier date that any payment of the taxes claimed is due from the
Employee, but in no event sooner than five calendar days after the Company
receives or delivers such Tax Claim Notice), the Company shall have
notified the Employee in writing ("Election Notice") that the Company does
not dispute its obligations (including, but not limited to, its indemnity
obligations) under this Agreement and that the Company elects to contest,
and to control the defense or prosecution of, such Employee Claim at the
Company's sole risk and sole cost and expense; and
(ii) the Company shall have advanced to the Employee on an
interest-free basis, the total amount of the tax claimed in order for the
Employee, at the Company's request, to pay or cause to be paid the tax
claimed, file a claim for refund of such tax and, subject to the provisions
of the last sentence of Section 11(g), sue for a refund of such tax if such
claim for refund is disallowed by the appropriate taxing authority (it
being understood and agreed by the parties hereto that the Company shall
only be entitled to sue for a refund and the Company shall not be entitled
to initiate any proceeding in, for example, United States Tax Court) and
shall indemnify and hold the Employee harmless, on a fully grossed-up after
tax basis, from any tax imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and
(iii) the Company shall reimburse the Employee for any and all costs
and expenses resulting from any such request by the Company and shall
indemnify and hold the Employee harmless, on fully grossed-up after-tax
basis, from any tax imposed as a result of such reimbursement.
(e) Subject to the provisions of Section 11(e) hereof, the Company shall
have the right to defend or prosecute, at the sole cost, expense and risk of the
Company, such Employee Claim by all appropriate proceedings, which proceedings
shall be defended or prosecuted diligently by the Company to a Final
Determination; PROVIDED, HOWEVER, that (I) the Company shall not, without the
Employee's prior written consent, enter into any compromise or settlement of
such Employee Claim that would adversely affect the Employee, (ii) any request
from the Company to the Employee regarding any extension of the statute of
limitations relating to assessment, payment, or collection of taxes for the
taxable year of the Employee with respect to which the contested issues involved
in, and amount of, the Employee Claim relate is limited solely to such contested
issues and amount, and (iii) the Company's control of any contest or proceeding
shall be limited to issues with respect to the Employee Claim and the Employee
shall be entitled to settle or contest, in his sole and absolute discretion, any
other issue raised by the Internal Revenue Service or any other taxing
authority. So long as the Company is diligently defending or prosecuting such
Employee Claim, the Employee shall provide or cause to be provided to the
Company any information reasonably requested by the Company that relates to such
Employee Claim, and shall otherwise cooperate with the Company and its
representatives in good faith in order to contest effectively such Employee
Claim. The Company shall keep the Employee informed of all developments and
events relating to any such Employee Claim (including, without limitation,
providing to the Employee copies of all written materials pertaining to any such
Employee Claim), and the Employee or his authorized representatives shall be
entitled, at the Employee's expense, to participate in all conferences, meetings
and proceedings relating to any such Employee Claim.
(f) If, after actual receipt by the Employee of an amount of a tax claimed
(pursuant to an Employee Claim) that has been advanced by the Company pursuant
to Section 11(e)(ii) hereof, the extent of the liability of the Company
hereunder with respect to such tax claimed has been established by a Final
Determination, the Employee shall promptly pay or cause to be paid to the
Company any refund actually received by, or actually credited to, the Employee
with respect to such tax (together with any interest paid or credited thereon by
the taxing authority and any recovery of legal fees from such taxing authority
related thereto), except to the extent that any amounts are then due and payable
by the Company to the Employee, whether under the provisions of this Agreement
or otherwise. If, after the receipt by the Employee of an amount advanced by
the Company pursuant to Section 11(e)(ii), a determination is made by the
Internal Revenue Service or other appropriate taxing authority that the Employee
shall not be entitled to any refund with respect to such tax claimed and the
Company does not notify the Employee in
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writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of any Gross-Up
Payments and other payments required to be paid hereunder.
(g) With respect to any Employee Claim, if the Company fails to deliver an
Election Notice to the Employee within the period provided in Section 11(e)(I)
hereof or, after delivery of such Election Notice, the Company fails to comply
with the provisions of Section 11(e)(ii) and (iii) and (f) hereof, then the
Employee shall at any time thereafter have the right (but not the obligation),
at his election and in his sole and absolute discretion, to defend or prosecute,
at the sole cost, expense and risk of the Company, such Employee Claim. The
Employee shall have full control of such defense or prosecution and such
proceedings, including any settlement or compromise thereof. If requested by
the Employee, the Company shall cooperate, and shall cause its Affiliates to
cooperate, in good faith with the Employee and his authorized representatives in
order to contest effectively such Employee Claim. The Company may attend, but
not participate in or control, any defense, prosecution, settlement or
compromise of any Employee Claim controlled by the Employee pursuant to this
Section 11(h) and shall bear its own costs and expenses with respect thereto.
In the case of any Employee Claim that is defended or prosecuted by the
Employee, the Employee shall, from time to time, be entitled to current payment,
on a fully grossed-up after tax basis, from the Company with respect to costs
and expenses incurred by the Employee in connection with such defense or
prosecution.
(h) In the case of any Employee Claim that is defended or prosecuted to a
Final Determination pursuant to the terms of this Section 11(I), the Company
shall pay, on a fully grossed-up after tax basis, to the Employee in immediately
available funds the full amount of any taxes arising or resulting from or
incurred in connection with such Employee Claim that have not theretofore been
paid by the Company to the Employee, together with the costs and expenses, on a
fully grossed-up after tax basis, incurred in connection therewith that have not
theretofore been paid by the Company to the Employee, within ten calendar days
after such Final Determination. In the case of any Employee Claim not covered
by the preceding sentence, the Company shall pay, on a fully grossed-up after
tax basis, to the Employee in immediately available funds the full amount of any
taxes arising or resulting from or incurred in connection with such Employee
Claim at least ten calendar days before the date payment of such taxes is due
from the Employee, except where payment of such taxes is sooner required under
the provisions of this Section 11(I), in which case payment of such taxes (and
payment, on a fully grossed-up after tax basis, of any costs and expenses
required to be paid under this Section 11(I) shall be made within the time and
in the manner otherwise provided in this Section 11(I).
(i) For purposes of this Agreement, the term "Final Determination" shall
mean (A) a decision, judgment, decree or other order by a court or other
tribunal with appropriate jurisdiction, which has become final and
non-appealable; (B) a final and binding settlement or compromise with an
administrative agency with appropriate jurisdiction, including, but not limited
to, a closing agreement under Section 7121 of the Code; -C- any disallowance of
a claim for refund or credit in respect to an overpayment of tax unless a suit
is filed on a timely basis; or (D) any final disposition by reason of the
expiration of all applicable statutes of limitations.
(j) For purposes of this Agreement, the terms "tax" and "taxes" mean any
and all taxes of any kind whatsoever (including, but not limited to, any and all
Excise Taxes, income taxes, and employment taxes), together with any interest
thereon, any penalties, additions to tax, or additional amounts with respect to
such taxes and any interest in respect of such penalties, additions to tax, or
additional amounts.
SECTION 13. EXPENSES OF ENFORCEMENT. If a Change in Control of the Company
shall have occurred before the expiration of the term of this Agreement, then,
upon demand by the Employee made to the Company, the Company shall reimburse the
Employee for the reasonable expenses (including attorneys' fees and expenses)
incurred by the Employee in enforcing or seeking to enforce the payment of any
amount or other benefit to which the Employee shall have become entitled
pursuant to this Agreement, including those incurred in connection with any
arbitration initiated pursuant to Section 20. To the extent that any such
reimbursement would be subject to the Excise Tax, then the Employee shall be
entitled to receive Gross-Up Payments in an amount such that after payment by
the Employee of all taxes imposed on such Gross-Up Payments, the Employee
retains an amount equal to the Excise Tax imposed upon the reimbursement, and
the other provisions of Section 11 hereof shall also apply to such circumstance
unless the context thereof otherwise indicates.
SECTION 14. EMPLOYMENT BY WHOLLY OWNED ENTITIES. If, at or after the
Effective Date, the Employee
-10-
<PAGE>
is or becomes an employee of one or more corporations, partnerships, limited
liability companies or other entities that are, directly or indirectly,
wholly owned by the Company ("Wholly Owned Entities"), references in this
Agreement to the Employee's employment by the Company shall include the
Employee's employment by any such Wholly Owned Entity.
SECTION 15. NO OBLIGATION TO MITIGATE; NO RIGHTS OF OFFSET.
(a) The Employee shall not be required to mitigate the amount of any
payment or other benefit required to be paid to the Employee pursuant to this
Agreement, whether by seeking other employment or otherwise, nor shall the
amount of any such payment or other benefit be reduced on account of any
compensation earned by the Employee as a result of employment by another person.
(b) The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Employee or others.
SECTION 16. AMENDMENT AND WAIVER. No provision of this Agreement may be
amended or waived (whether by act or course of conduct or omission or otherwise)
unless that amendment or waiver is by written instrument signed by the parties
hereto. No waiver by either party of any breach of this Agreement shall be
deemed a waiver of any other or subsequent breach.
SECTION 17. GOVERNING LAW. The validity, interpretation, construction and
enforceability of this Agreement shall be governed by the laws of the State of
Oklahoma.
SECTION 18. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
SECTION 19. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which together will
constitute the same instrument.
SECTION 20. ASSIGNMENT. This Agreement shall inure to the benefit of and
be enforceable by the Employee's legal representative. The Company may not
assign any of its obligations under this Agreement unless (I) such assignment is
to a Successor and (ii) the requirements of Section 8 are fulfilled.
SECTION 21. ARBITRATION. Except as otherwise explicitly provided in
Section 11, any dispute between the parties arising out of this Agreement,
whether as to this Agreement's construction, interpretation or enforceability or
as to any party's breach or alleged breach of any provision of this Agreement,
shall be submitted to arbitration in accordance with the following procedures:
(i) Either party may demand such arbitration by giving notice of
that demand to the other party. The notice shall state (x) the matter in
controversy, and (y) the name of the arbitrator selected by the party
giving the notice.
(ii) Not more than 15 days after such notice is given, the other
party shall give notice to the party who demanded arbitration of the name
of the arbitrator selected by the other party. If the other party shall
fail to timely give such notice, the arbitrator that the other party was
entitled to select shall be named by the Arbitration Committee of the
American Arbitration Association. Not more than 15 days after the second
arbitrator is so named, the two arbitrators shall select a third
arbitrator. If the two arbitrators shall fail to timely select a third
arbitrator, the third arbitrator shall be named by the Arbitration
Committee of the American Arbitration Association.
(iii) The dispute shall be arbitrated at a hearing that shall be
concluded within ten days immediately following the date the dispute is
submitted to arbitration unless a majority of the arbitrators shall elect
to extend the period of arbitration. Any award made by a majority of the
arbitrators (x) shall be made within ten days following the conclusion of
the arbitration hearing,
-11-
<PAGE>
(y) shall be conclusive and binding on the parties, and (z) may be made
the subject of a judgment of any court having jurisdiction.
(iv) All expenses of the arbitration shall be borne by the Company.
The agreement of the parties contained in the foregoing provisions of this
Section 20 shall be a complete defense to any action, suit or other proceeding
instituted in any court or before any administrative tribunal with respect to
any dispute between the parties arising out of this Agreement.
SECTION 22. INTERPRETATION.
(a) As used in this Agreement, the following terms and phrases have the
indicated meanings:
(i) "Affiliate" and "Affiliates" mean, when used with respect to
any entity, individual, or other person, any other entity, individual, or
other person which, directly or indirectly, through one or more
intermediaries controls, or is controlled by, or is under common control
with such entity, individual or person.
(ii) "Base Salary" has the meaning assigned to that term in
Section 5.
(iii) "Basic Benefit Plans" has the meaning assigned to that term in
Section 5.
(iv) "Benchmark Bonus" has the meaning assigned to that term in
Section 5.
(v) "Board of Directors" means the Board of Directors of the
Company.
(vi) "Change in Control of the Company" has the meaning assigned to
that phrase in Section 2.
(vii) "Claim" has the meaning assigned to such term in Section 11.
(viii) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(ix) "Commission" means the United States Securities and Exchange
Commission or any successor agency.
(x) "Company" has the meaning assigned to that term in the preamble
to this Agreement. The term "Company" shall also include any Successor,
whether the liability of such Successor under this Agreement is established
by contract or occurs by operation of law.
(xi) "Determination" has the meaning assigned to that term in
Section 11.
(xii) "Dispute" has the meaning assigned to that term in Section 11.
(xiii) "Effective Date" has the meaning assigned to that term in the
preamble to this Agreement.
(xiv) "Election Notice" has the meaning assigned to such term in
Section 11.
(xv) "Employee" has the meaning assigned to such term in the
preamble to this Agreement.
(xvi) "Employee Claim" has the meaning assigned to such term in
Section 11.
(xvii) "Employee's Disability" means:
-12-
<PAGE>
(A) if no Change in Control of the Company shall have occurred before
the date of determination, the physical or mental disability of
the Employee determined in accordance with the disability policy
of the Company at the time in effect and generally applicable to
its salaried employees; and
(B) if a Change in Control of the Company shall have occurred at that
date, the physical or mental disability of the Employee
determined in accordance with the disability policy of the
Company in effect immediately before the occurrence of the first
Change in Control of the Company and generally applicable to its
salaried employees.
The Employee's Disability, and the automatic termination of the Employee's
employment by the Company by reason of the Employee's Disability, shall be
deemed to have occurred on the date of determination, PROVIDED that if (1) a
Change in Control of the Company shall have occurred before the expiration of
the term of this Agreement, (2) the Company shall have subsequently given notice
pursuant to Section 6 of the Company's determination of the Employee's
Disability, and (3) the Employee shall have given notice to the Company that the
Employee disagrees with that determination, then (A) whether the Employee's
Disability shall have occurred shall be submitted to arbitration pursuant to
Section 20, and (B) if a majority of the arbitrators decide that the Employee's
Disability had not occurred, at the date of determination by the Company, then
(I) the Employee's Disability, and the automatic termination of the Employee's
employment by the Company by reason of the Employee's Disability, shall be
deemed not to have occurred, and (II) on demand by the Employee made to the
Company, the Company shall reimburse the Employee for the reasonable expenses
(including attorneys' fees and expenses) incurred by the Employee in obtaining
that decision.
(xviii) "Employee's Retirement" means (x) if no Change in Control of the
Company shall have occurred before the date of the Employee's proposed
retirement, the retirement of the Employee in accordance with the retirement
policy of the Company at the time in effect and generally applicable to its
salaried employees, and (y) if a Change in Control of the Company shall have
occurred at that date, the retirement of the Employee from the employ of the
Company in accordance with the retirement policy of the Company in effect
immediately before the occurrence of the first Change in Control of the Company
and generally applicable to its salaried employees.
(xix) "Event of Termination for Good Reason" has the meaning assigned
to that phrase in Section 5.
(xx) "Event of Termination for Cause" has the meaning assigned to that
phrase in Section 4.
(xxi) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(xxii) "Excise Tax" has the meaning assigned to that term in Section 11.
(xxiii) "Expiration Date" has the meaning assigned to that term in
Section 3.
(xxiv) "Final Determination" has the meaning assigned to such term in
Section 11.
(xxv) "Gross-Up Payment" has the meaning assigned to that term in
Section 11.
(xxvi) "Other Benefit Plans" has the meaning assigned to that term in
Section 5.
(xxvii) "Payment" has the meaning assigned to that term in Section 11.
(xxviii) "person" means any individual, corporation, partnership, joint
venture,
-13-
<PAGE>
association, joint-stock company, limited partnership, limited liability
company, trust, unincorporated organization, government, or agency or
political subdivision of any government.
(xxix) "Relevant Period" means a period beginning on the Termination
Date and ending on the first to occur of (x) the last day of the 18th calendar
month immediately following the calendar month in which the Termination Date
occurs, (y) the date on which the Employee becomes a full time employee of
another person and (z) the Employee's normal retirement date, determined in
accordance with the retirement policy of the Company in effect on the
Termination Date.
(xxx) "Severance Payment" has the meaning assigned to that term in
Section 7.
(xxxi) "Successor" means a person with or into which the Company shall
have been merged or consolidated or to which the Company shall have transferred
its assets as an entirety or substantially as an entirety.
(xxxii) "Tax" has the meaning assigned to that term in Section 11.
(xxxiii) "Tax Claim Notice" has the meaning assigned to that term in
Section 11.
(xxxiv) "Tax Counsel" has the meaning assigned to that term in
Section 11.
(xxxv) "Termination Date" has the meaning assigned to that term in
Section 6.
(xxxvi) "this Agreement" means this Change in Control Agreement as it may
be amended from time to time in accordance with Section 15.
(xxxvii) "Underpayment" has the meaning assigned to that term in
Section 11.
(xxxviii) "Voting Stock" means shares of capital stock of the Company the
holders of which are entitled to vote for the election of directors, but
excluding shares entitled to so vote only upon the occurrence of a contingency
unless that contingency shall have occurred.
(xxxix) "Wholly Owned Entities" has the meaning assigned to that term in
Section 13.
(b) In the event of the enactment of any successor provision to any
statute or rule cited in this Agreement, references in this Agreement to such
statute or rule shall be to such successor provision.
-C- The headings of Sections of this Agreement shall not control the
meaning or interpretation of this Agreement.
(c) References in this Agreement to any Section are to the
corresponding Section of this Agreement unless the context otherwise indicates.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the Effective Date.
"COMPANY"
UROCOR, INC.
By
---------------------------------------
Name: William A. Hagstrom
Title: Chairman and Chief Executive Officer
-14-
<PAGE>
"EMPLOYEE"
-------------------------------------------
Name:
-------------------------------------
-15-
<PAGE>
SCHEDULE 10.18
CHANGE IN CONTROL AGREEMENTS
<TABLE>
<CAPTION>
NAME PERCENT
- ---- -------
<S> <C>
William A. Hagstrom 40%
Michael W. George 50%
Socrates H. Choumbakos 25%
Michael N. McDonald 25%
Mark G. Dimitroff 30%
Robert W. Veltri 30%
Lou R. Carmichael 30%
Karl K. Nigg 25%
Gerard J. O'Dowd 20%
</TABLE>
-16-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated February 5, 1999, included on pages F-2 and S-1 of the
1998 Annual Report to Shareholders on Form 10-K of UroCor, Inc., into the
previously filed Registration Statements on Form S-8 (File Nos. 333-16075,
333-58013, 333-58015 and 333-58017) of UroCor, Inc.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
February 5, 1999
-1-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET FOR DECEMBER 31, 1998 AND THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,034,123
<SECURITIES> 6,057,160
<RECEIVABLES> 21,993,810
<ALLOWANCES> 6,029,066
<INVENTORY> 694,897
<CURRENT-ASSETS> 38,923,091
<PP&E> 16,332,737
<DEPRECIATION> 6,363,492
<TOTAL-ASSETS> 53,319,939
<CURRENT-LIABILITIES> 4,476,344
<BONDS> 0
0
0
<COMMON> 104,927
<OTHER-SE> 48,730,061
<TOTAL-LIABILITY-AND-EQUITY> 48,834,988
<SALES> 0
<TOTAL-REVENUES> 47,606,143
<CGS> 0
<TOTAL-COSTS> 17,330,508
<OTHER-EXPENSES> 26,680,704
<LOSS-PROVISION> 8,409,477
<INTEREST-EXPENSE> 74,156
<INCOME-PRETAX> (3,994,128)
<INCOME-TAX> (1,517,769)
<INCOME-CONTINUING> (2,476,359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,476,359)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
