<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / 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
UROCOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2117882
(State of incorporation) (IRS Employer Identification No.)
840 RESEARCH PARKWAY, OKLAHOMA CITY, OK 73104
(Address of principal executive offices) (zip code)
(405) 290-4000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares of issuer's Common Stock, $.01 par value, outstanding
on July 20, 1999 was 9,605,948 shares.
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<PAGE>
UROCOR, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of June 30, 1999 and December 31, 1998.......................................... 3
Statements of Operations for the three and six months ended June 30, 1999 and 1998................ 4
Statements of Cash Flows for the six months ended June 30, 1999 and 1998.......................... 5
Notes to Unaudited Interim Financial Statements--June 30, 1999.................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 8-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS...................................... 14
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................................ 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................................ 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 16
ITEM 5. OTHER INFORMATION................................................................................ 16-22
Cautionary Statements
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 23
Signatures................................................................................................ 24
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UROCOR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998
JUNE 30, --------------
1999
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 9,965,633 $ 11,034,123
Short-term marketable investments............................................... 2,184,180 6,057,160
Accounts receivable, net of allowance for doubtful accounts of $10,338,913 at
June 30, 1999 and $6,029,066 at December 31, 1998............................. 10,374,147 15,964,744
Prepaid expenses................................................................ 474,226 946,403
Laboratory supplies, at average cost............................................ 561,291 458,569
Inventory....................................................................... 221,508 236,328
Deferred tax asset--current, net................................................ 5,386,114 3,159,855
Other current assets............................................................ 835,053 1,065,909
-------------- --------------
Total current assets.......................................................... 30,002,152 38,923,091
-------------- --------------
LONG-TERM MARKETABLE INVESTMENTS.................................................. 2,845,057 2,112,333
PROPERTY AND EQUIPMENT, net....................................................... 8,550,209 9,969,245
NON-CURRENT DEFERRED TAX ASSET, net............................................... 199,263 174,671
INTANGIBLES AND OTHER ASSETS, net................................................. 2,533,851 2,140,599
-------------- --------------
Total assets.................................................................. $ 44,130,532 $ 53,319,939
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 2,958,846 $ 3,490,381
Accrued compensation............................................................ 950,847 404,444
Current installments of obligations under capital leases........................ 77,570 209,092
Other accrued liabilities....................................................... 285,574 372,427
-------------- --------------
Total current liabilities..................................................... 4,272,837 4,476,344
DEFERRED COMPENSATION............................................................. 116,483 --
OBLIGATIONS UNDER CAPITAL LEASES, net of current installments..................... -- 8,607
-------------- --------------
Total liabilities............................................................. 4,389,320 4,484,951
-------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 6,000,000 shares at June 30, 1999
and at December 31, 1998; no shares issued and outstanding at June 30, 1999 or
at December 31, 1998.......................................................... -- --
Common stock, $.01 par value, authorized 20,000,000 shares at June 30, 1999 and
at December 31, 1998; 10,541,914 shares issued at June 30, 1999 and 10,492,726
shares issued and outstanding at December 31, 1998............................ 105,419 104,927
Common stock held in treasury at cost, 937,466 shares........................... (4,953,005) --
Additional paid-in capital...................................................... 59,054,633 58,945,418
Accumulated deficit............................................................. (14,465,835) (10,215,357)
-------------- --------------
Total stockholders' equity.................................................... 39,741,212 48,834,988
-------------- --------------
Total liabilities and stockholders' equity.................................... $ 44,130,532 $ 53,319,939
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
UROCOR, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE............................................. $ 11,295,113 $ 11,264,046 $ 23,572,217 $ 21,877,841
OPERATING EXPENSES:
Direct cost of services and products.............. 4,361,225 4,420,462 8,675,374 8,468,454
Selling, general and administrative expenses...... 7,307,755 5,931,452 13,622,702 11,500,558
Research and development.......................... 429,862 499,180 808,014 1,007,554
Special charges................................... 7,409,777 -- 7,409,777 --
------------- ------------- ------------- -------------
Total operating expenses........................ 19,508,619 10,851,094 30,515,867 20,976,566
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS):............................ (8,213,506) 412,952 (6,943,650) 901,275
OTHER INCOME:
Interest, net..................................... 229,705 297,336 486,234 633,408
Other............................................. (43,032) -- (43,032) --
------------- ------------- ------------- -------------
Total other income, net......................... 186,673 297,336 443,202 633,408
------------- ------------- ------------- -------------
Income (loss) before income taxes................... (8,026,833) 710,288 (6,500,448) 1,534,683
Income taxes (benefit).............................. (2,830,944) 270,000 (2,249,965) 583,000
------------- ------------- ------------- -------------
NET INCOME (LOSS)................................... $ (5,195,889) $ 440,288 $ (4,250,483) $ 951,683
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME (LOSS) PER SHARE:
Basic:
Net Income (Loss) Per Common Share................ $ (.52) $ .04 $ (.41) $ .09
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted Average Common and Common Equivalent
Shares Outstanding.............................. 10,077,465 10,374,727 10,286,192 10,362,553
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted:
Net Income (Loss) Per Common Share-- Assuming
Dilution........................................ $ (.52) $ .04 $ (.41) $ .09
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted Average Common and Common Equivalent
Shares Outstanding--Assuming Dilution........... 10,077,465 11,069,285 10,286,192 11,052,295
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
UROCOR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................ $ (4,250,483) $ 951,683
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................................. 1,394,970 1,249,799
Deferred income tax............................................................ (2,249,965) 114,000
Stock option compensation expense.............................................. 4,576 62,627
Increase in deferred compensation.............................................. 116,483 --
(Gain) loss on disposition of equipment........................................ 43,032 (4,972)
Loss on asset write down....................................................... 3,226,846 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable..................................... 5,590,597 (5,024,806)
(Increase) decrease in prepaid expense......................................... 472,177 (194,008)
(Increase) decrease in laboratory supplies..................................... (102,722) 53,903
Decrease in inventory.......................................................... 14,820 --
Decrease in other current assets............................................... 230,856 144,468
Decrease in accounts payable................................................... (531,535) (417,337)
Increase in accrued compensation............................................... 546,403 182,122
Decrease in accrued liabilities................................................ (86,853) (9,209)
------------- -------------
Net cash provided by (used in) operating activities.......................... 4,419,202 (2,057,056)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term marketable investments, net............................. 3,872,980 10,608,446
Purchases of long-term marketable investments, net............................... (732,724) 982,097
Capital expenditures............................................................. (3,173,927) (2,292,364)
Intangibles and other assets..................................................... (466,019) (214,912)
------------- -------------
Net cash provided by (used in) investing activities.......................... (499,690) 9,083,267
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan....................................... 63,065 103,434
Purchase of treasury shares...................................................... (4,953,005) --
Proceeds from exercise of stock options.......................................... 42,066 120,763
Principal payments under capital lease obligations and other indebtedness........ (140,128) (266,965)
------------- -------------
Net cash used in financing activities........................................ (4,988,002) (42,768)
------------- -------------
Net increase (decrease) in cash and cash equivalents............................. (1,068,490) 6,983,443
CASH AND CASH EQUIVALENTS, beginning of year....................................... 11,034,123 6,896,033
------------- -------------
CASH AND CASH EQUIVALENTS, end of period........................................... $ 9,965,633 $ 13,879,476
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................................... $ 8,386 $ 28,700
Cash paid for income taxes....................................................... 300,000 350,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
UROCOR, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
NOTE 1--BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation have been
included. These interim financial statements should be read in conjunction with
the financial statements and notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 filed with the Securities and
Exchange Commission on March 31, 1999.
Operating results for the six-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1999.
NOTE 2--SPECIAL CHARGES:
During the second quarter of 1999, the Company recognized special charges
consisting of the following:
<TABLE>
<S> <C>
Increased provision for accounts receivable..................... $3,941,833
Information systems restructuring costs......................... 2,893,700
Settlement of certain Urology Support Services ("USS") claims... 348,146
Severance costs for workforce reduction......................... 226,098
---------
Total special charges........................................... $7,409,777
---------
---------
</TABLE>
Subsequent to increasing the provision for accounts receivable in the third
quarter of 1998, the Company continued reorganizing and streamlining its
accounts receivable and billing functions, which has resulted in improved
collections on recent billings. During the second quarter of 1999, however, the
Company discontinued certain managed care and payor related marketing programs
and identified significantly aged segments of its accounts receivable for which
the likelihood of collectibility is doubtful, or the expected benefit could
exceed the processing cost. Accordingly, a provision of $3,941,833 was made for
those receivable balances.
During the second quarter of 1999, the Company accelerated an information
systems initiative to increase productivity, decrease costs and more efficiently
collect billings. As a result of this new operational focus on information
systems, the Company has restructured its information systems function and
terminated certain existing systems and internal software development projects.
The write-offs for systems and software projects related to this restructuring
totaled $2,893,700. Severance and outplacement costs associated with
restructuring this function and ending certain development projects are accrued
at $226,098 for seven people employed by the information systems function and
three people employed in other areas of the Company that were involved in
terminated projects. These amounts are anticipated to be paid during the third
and fourth quarter of 1999.
At the end of the third quarter of 1998, the Company made the decision to
exit the USS business and accrued estimable costs associated with exiting this
business. During the second quarter of 1999, the Company settled claims by two
of the former clients of the USS business, which together with legal fees
incurred by the Company resulted in costs of $348,146 in excess of amounts that
had been previously accrued.
6
<PAGE>
UROCOR, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1999
NOTE 3--NET INCOME (LOSS) PER COMMON SHARE:
For the three and six months ending June 30, 1999, the otherwise dilutive
impact of outstanding stock options and warrants is excluded from the
computation of Diluted Net Loss Per Share because such impact is antidilutive in
the period of a net loss (i.e., consideration of such shares would result in a
lower Diluted Net Loss Per Share in comparison to the Basic Net Loss Per Share).
NOTE 4--INVESTMENTS:
Pursuant to the Company's investment policy, idle and excess funds are
invested in high grade, fixed income securities generally for no more than two
years. These securities are considered available-for-sale as of June 30, 1999.
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 June 30, 1999, there was not a material net unrealized gain or
loss on these investments.
NOTE 5--COMMITMENTS AND CONTINGENCIES:
On April 14, 1999, a complaint was filed by a physician group against the
Company claiming damages resulting from the Company's performance of and in
connection with the discontinuation of the Company's USS business. The asserted
damages claimed totaled approximately $500,000. This particular matter was
settled for $250,000 and is included in special charges.
In July 1998 and March 1999, the Company received Civil Investigative
Demands ("CID") from the Department of Justice ("DOJ"). 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 could have a material adverse effect on the financial condition and
results of operations of the Company.
NOTE 6--STOCK REPURCHASE PROGRAM:
On April 20, 1999, the Board of Directors of the Company authorized the
repurchase by the Company of up to $10 million of UroCor common stock.
Management expects that the repurchase program will be conducted from time to
time on the open market or in privately negotiated transactions, depending upon
market conditions, securities regulations and other factors. As of July 27,
1999, the Company had repurchased approximately $5.0 million (or approximately
937,000 shares) of common stock. Management also expects that, depending upon
the number of shares purchased, the Company may elect to supplement its cash
position with new debt.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of operations and financial condition of UroCor,
Inc. ("UroCor" or the "Company") should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Quarterly
Report on Form 10-Q. Special Note: Certain statements set forth below constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. See "Special Note Regarding Forward-Looking Statements" and
"Cautionary Statements" included elsewhere in this Report.
OVERVIEW
UroCor 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.
For the three months ended June 30, 1999, the Company derived over 90% of
its revenue from diagnostic products and services that UroCor Labs-TM- 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 three months
ended June 30, 1999, approximately 47%, 42%, 6% and 5% of the Company's
diagnostic revenue was attributable to Medicare, private insurance and managed
care, individual patients, and physicians and hospitals, respectively.
During the three months ended June 30, 1999, the Company derived
approximately 4% of its revenue from the marketing of two therapeutic products
for advanced prostate cancer pursuant to a co-promotion agreement with a
manufacturer. Under this agreement, the Company recognizes revenue when earned
based primarily on completed sales calls.
The Company also has worldwide marketing and distribution rights for a
UroCor branded line of radiation implants (also referred to as "seeds") used in
brachytherapy for early stage prostate cancer. This product received clearance
for marketing from the United States Food and Drug Administration (the "FDA") in
April 1999, and the manufacturer is now awaiting approval from the Nuclear
Regulatory Commission before commercial shipment of seeds can begin. The Company
expects to begin marketing this product in the United States in 1999.
RESULTS OF OPERATIONS
REVENUE. Revenue for the three months ended June 30, 1999 was comparable to
the three months ended June 30, 1998 at approximately $11.3 million, and
increased 7.9% from approximately $21.9 million to $23.6 million in the first
six months of 1999. Diagnostics revenue increased 7.6% for the three-month
period and 16.2% for the six-month period resulting primarily from an increase
in case volume of 11.3% and 22.3%, respectively, due to an expansion of the
Company's client base from approximately 2,350 in June 1998 to over 2,650
urologists in June 1999. The diagnostics revenue and volume growth rate for the
second quarter of 1999 is lower relative to previous quarters primarily as a
result of the elimination of certain managed care marketing programs and related
collection efforts. Although the Company maintained the same number of
urologists from the first quarter of 1999 (approximately 2,650), the number of
clients accessing two or more products declined from 50% in the second quarter
of 1998 and the first quarter of 1999 to 48% in the second quarter of 1999,
reflecting that clients using two or more products were lost or declined product
usage while most new clients started with only one product. The Company does not
expect the current growth rate to be indicative of future growth rates, as the
Company intends to
8
<PAGE>
focus its marketing and sales efforts for the remainder of 1999 on improving the
diagnostics growth rates. Therapeutics product co-promotion revenue decreased
59.7% from approximately $1.1 million for the three months ended June 30, 1998
to approximately $455,000 for the three months ended June 30, 1999, and
decreased 53.5% from approximately $2.4 million for the six months ended June
30, 1998 to approximately $1.1 million in the six months ended June 30, 1999
principally due to a restructuring of the compensation terms of the related
co-promotion agreement in late 1998.
DIRECT COST OF SERVICES AND PRODUCTS. As a percentage of revenue, direct
expenses decreased to 38.6% for the three months ended June 30, 1999 from 39.2%
for the three months ended June 30, 1998 and decreased to 36.8% for the six
months ended June 30, 1999 from 38.7% for the six months ended June 30, 1998. In
the aggregate, direct cost of services and products remained constant for the
three months ended June 30, 1998 and 1999 at approximately $4.4 million and
direct costs increased 2.4% in the aggregate from approximately $8.5 million for
the six months ended June 30, 1998 to approximately $8.7 million for the six
months ended June 30, 1999. Direct costs for the three and six month periods
ended June 30, 1998 included approximately $262,000 and $425,000, respectively,
for nonrecurring direct costs associated with the Urology Support Services
("USS") business that the Company exited later in 1998. As a percentage of
revenue, direct costs for the three and six month periods ended June 30, 1998,
excluding the direct costs associated with USS would have been 36.9% and 36.8%,
respectively. Compared to these adjusted percentages for the 1998 periods,
direct costs for the comparable 1999 three-month period increased from 36.9% to
38.6% and remained even for the comparable 1999 six-month period at 36.8%. The
increase in this percentage for the 1999 three-month period compared to the
adjusted 1998 three-month period was the result of the decline in therapeutics
co-promotion revenue under the restructured terms of the co-promotion agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of revenue,
selling, general and administrative expenses increased to 64.7% for the three
months ended June 30, 1999 from 52.7% for the three months ended June 30, 1998
and increased to 57.6% for the six months ended June 30, 1999 from 52.6% for the
six months ended June 30, 1998. In the aggregate, selling, general and
administrative expenses increased 23.0%, from approximately $5.9 million in the
three months ended June 30, 1998 to approximately $7.3 million in the three
months ended June 30, 1999 and increased 18.3%, from approximately $11.5 million
in the six months ended June 30, 1998 to $13.6 million in the six months ended
June 30, 1999. Selling, general and administrative expenses for the three and
six month periods ended June 30, 1998 included approximately $172,000 and
$353,000, respectively for nonrecurring costs associated with the USS business
that the Company exited later in 1998. The increase in selling, general and
administrative expenses was due principally to increased management personnel,
increased professional fees related to addressing accounts receivable issues,
increased personnel and depreciation costs related to information services and
billing efforts, increased convention and meeting costs and the incurrence of
over $275,000 in second quarter expenses related to personnel, marketing and
information systems in anticipation of the upcoming launch of the Company's
brachytherapy seed product.
RESEARCH AND DEVELOPMENT EXPENSES. As a percentage of revenue, research and
development expenses decreased to 3.8% for the three months ended June 30, 1999
from 4.4% for the three months ended June 30, 1998 and to 3.4% for the six
months ended June 30, 1999 from 4.6% for the six months ended June 30, 1998. In
the aggregate, research and development costs decreased 13.9%, from
approximately $499,000 in the three months ended June 30, 1998 to approximately
$430,000 in the three months ended June 30, 1999, and decreased 19.8% from
approximately $1.0 million for the six months ended June 30, 1998 to
approximately $808,000 in the six months ended June 30, 1998. The decrease in
expenses was due primarily to elimination of non-strategic projects in the third
quarter of 1998 resulting in overall lower base research and development program
costs.
SPECIAL CHARGES. During the second quarter of 1999, the Company recognized
special charges related primarily to two items. First, as part of its ongoing
assessment of accounts receivable and reserve adequacy,
9
<PAGE>
the Company terminated certain managed care related marketing programs and
identified significantly aged segments of its accounts receivable for which the
likelihood of collectibility is doubtful. Accordingly, a provision of
approximately $3.9 million was made for these receivable balances. Second, the
Company launched an information systems initiative to increase productivity,
decrease costs and more efficiently collect billings. As a result of this new
operational focus for information systems, the Company restructured its
information systems function and terminated certain existing systems and
internal software development projects, resulting in approximately $2.9 million
in asset write-offs and approximately $226,000 in severance and outplacement
costs. Additionally, the Company settled claims with two former clients of the
USS business, which the Company exited in late 1998. These settlements totaled
approximately $348,000 in excess of amounts that had been accrued in 1998. The
aggregate charges for these three items totaled approximately $7.4 million for
the three months ended June 30, 1999; there were no such charges for the three
months ended June 30, 1998.
The following table sets forth the effects of the special charges on
UroCor's operating income, net income and diluted earnings per share for the
three and six month periods ended June 30, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------- -----------------
<S> <C> <C>
Operating loss, as reported.............................................. $ (8,213,506) $ (6,943,650)
Operating income (loss), excluding special charges....................... $ (803,729) $ 466,127
- -----------------------------------------------------------------------------------------------------------------
Net loss, as reported.................................................... $ (5,195,889) $ (4,250,483)
Net income (loss), excluding special charges............................. $ (394,354) $ 595,511
- -----------------------------------------------------------------------------------------------------------------
Diluted loss per share, as reported...................................... $ (.52) $ (.41)
Diluted earnings (loss) per share, excluding special charges............. $ (.04) $ .06
</TABLE>
OTHER INCOME (EXPENSE). Interest income net of interest expense decreased
22.7%, from approximately $297,000 in the three months ended June 30, 1998 to
approximately $230,000 in the three months ended June 30, 1999 and decreased
23.2%, from approximately $633,000 in the six months ended June 30, 1998 to
approximately $486,000 in the six months ended June 30, 1999. This decline was
due principally to decreased cash, cash equivalents and investments compared to
the three months ended June 30, 1998, resulting from the use of such resources
to fund stock repurchases and capital expenditures.
INCOME TAXES. Income tax expense recorded in the three months ended June
30, 1998 was approximately $270,000 while an income tax benefit of approximately
$2.8 million was recorded in the three months ended June 30, 1999 based on a
35.5% effective federal and state income tax rate. For the six months ended June
30, 1998, income tax of approximately $583,000 was recorded based upon a 38%
effective rate, while an income tax benefit of $2.3 million was recorded for the
six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, cash, cash equivalents and marketable investments
totaled approximately $15.0 million and the Company's working capital was
approximately $25.7 million. As of June 30, 1999, the components of cash, cash
equivalents and marketable investments were cash and cash equivalents of
approximately $10.0 million, short-term marketable investments of approximately
$2.2 million and long-term marketable investments of approximately $2.8 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 $10.4 million at June 30, 1999, a decrease of approximately $5.6
million from December 31, 1998, or 35.0%. This decrease is attributable to an
increase in the allowance for doubtful accounts of $4.3 million and decrease in
accrued therapeutics revenue of $1.7 million, partially offset by increased
diagnostics receivables. At June 30, 1999
10
<PAGE>
and December 31, 1998, the Company's average number of days sales in net
diagnostics receivables was approximately 81 and 110, respectively.
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.
The Company monitors the collection quality of its accounts receivable
through analytical review of aging categories by payor group and collections
performance. In the second quarter of 1999, the Company recorded a special
charge of $3.9 million to increase the allowance for doubtful accounts in
respect of terminating certain managed care related marketing programs and
identifying significantly aged segments of its accounts receivable for which the
likelihood of collectibility is doubtful. In 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, and the
Company also determined that it had not sent 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 unsent invoices. Partially in response to the collection
efforts undertaken by the Company for the previously delayed invoices to
patients for co-pays, deductibles and other amounts determined in 1998, some
urologists for such patients discontinued or reduced their use of the Company's
diagnostic services. The loss of any additional clients' business could
adversely affect the rate of the Company's growth in revenues and the Company's
results of operations.
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 financial position and results of operations.
In October 1997, the Company entered into a co-promotion agreement with the
manufacturer of two therapeutic products. This agreement was revised effective
January 1, 1999, and for the three months ended June 30, 1999, the Company
recorded revenue of approximately $455,000 under the agreement, as compared to
$1.1 million for the three months ended June 30, 1998. The Company recognizes
revenue under the current agreement when earned based primarily upon sales calls
completed by the Company and has a potential to recognize a bonus at year end if
certain sales goals are attained. However, based upon current performance, the
Company has not accrued revenue related to this bonus. The Company does not
believe that results under the co-promotion agreement prior to January 1, 1999
will be indicative of future results under the revised agreement or that the
Company will achieve the same level of revenues under the agreement as in 1998.
Operating activities provided net cash of approximately $4.4 million for the
six months ended June 30, 1999 compared to using net cash of approximately $2.1
million for the six months ended June 30, 1998. The net cash provided by
operating activities was primarily the result of a net loss of $4.3 million and
related income tax benefit of approximately $2.2 million, more than offset by a
special charge of $3.2 million for asset write-offs related to restructuring the
Company's information systems function and terminating certain existing systems
and internal software development projects, a decrease in accounts receivable of
approximately $5.6 million primarily resulting from a special charge, and
depreciation and amortization of approximately $1.4 million.
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<PAGE>
Net cash used by investing activities was approximately $500,000 for the six
months ended June 30, 1999 and consisted primarily of maturities of short-term
marketable investments of approximately $3.8 million, offset by capital
expenditures of approximately $3.1 million, intangible and other assets of
approximately $466,000 related to progress payment for marketing distribution
rights, and purchases of long-term marketable investments of approximately
$700,000. Net cash used in financing activities was approximately $5.0 million
for the first six months of 1999, consisting primarily of purchases of stock
pursuant to the Company's stock repurchase program that commenced in April 1999.
The Company's capital expenditures of approximately $3.1 million for the six
months ended June 30, 1999, were primarily for leasehold improvements, furniture
and fixtures, and computer equipment and software associated with the Company's
relocation to newly constructed facilities adjacent to the former facilities. Of
the total amount, approximately $339,000 was related to internal software
development costs for information services. The Company has funded a portion of
the building tenant improvements and, in addition to expenditures made in the
six months ended June 30, 1999, expects to incur at least an additional $600,000
by the end of the third quarter of 1999 for such improvements and other capital
expenditures related to moving to the new building. 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 and possibly debt.
In December 1994, the Company obtained distribution rights to a therapeutic
product currently awaiting clearance by the FDA prior to marketing in the United
States. The total cost of the distribution rights is $3.0 million, payable in
installments based on achievement of certain milestones by the manufacturer, of
which the Company has paid $1.25 million. The Company expects to pay an
additional milestone payment of $1.75 million if and when the product receives
clearance by the FDA for marketing in the United States. The manufacturer has
advised the Company that it expects to receive FDA clearance before the end of
1999. If the Company is required to make this payment, it intends to do so out
of existing cash and investment balances or debt. The Company has the right to
terminate this agreement at any time prior to FDA clearance 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 an additional $500,000 to
the manufacturers based on achievement of certain milestones. In April 1999, the
Company paid one of such manufacturers $250,000 upon receiving clearance for
marketing from the FDA. As milestones are achieved, the Company intends to make
the additional payments from existing cash and investment balances or debt.
In April 1999, the Company's Board of Directors authorized the repurchase of
up to $10 million of the Company's common stock. As of July 27, 1999, the
Company had repurchased approximately $5.0 million (or approximately 937,000
shares) of its common stock. The Company intends to fund any such purchases
using available cash and cash flow from operations, and may elect to supplement
its cash position with new debt.
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 a timely basis or 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
12
<PAGE>
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 was the compilation of an inventory of systems and relationships
with suppliers, key customers and other business partners. This phase was
completed in the first quarter of 1999.
Phase 2 is the final assessment of each item identified in the inventory
compiled in Phase 1, verification of each item's compliance with Year 2000
requirements and a resulting financial risk analysis. The assessment and
verification portions of this phase were completed in the second quarter of
1999 and the financial risk analysis is anticipated to be completed early in
the third quarter of 1999.
Phase 3 is the resolution of any issues identified in Phase 2 and the
development of a contingency plan, as necessary, to deal with internal and
external risks associated with the Year 2000 issue. It is anticipated that
this phase will be completed by the end of the third quarter of 1999 for the
Company's internal systems. The resolution of Year 2000 issues for computer
systems utilized in client's offices for the Company's Internet Report
Delivery System ("IRDS") is being contracted out to a third-party vendor and
is anticipated to be completed by the end of 1999. Contingency planning to
address the impact that the Year 2000 issues of third parties may have on
the Company will be an ongoing process as the Company becomes aware of such
issues.
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 that it will fund such costs through existing
working capital and operating cash flows. The Company continues to analyze and
monitor its total expected costs associated with Year 2000 issues and currently
estimates that the total future expenditures specifically relating to the Year
2000 project will be approximately $300,000. This cost information represents
management's best-estimate, and there can be no assurance that further 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. The most significant exposure is to the federal government's Medicare
and Medicaid programs and with major insurance companies. These customers in
aggregate represent a material portion of the Company's revenue and
corresponding cash flow. As to suppliers and vendors, the most significant
exposures are those associated with services and products supply and
distribution. The Company will be monitoring industry reports to assess the
potential impact that Year 2000 issues could have on airports and air traffic
systems, as any such issues could impact the company's ability to receive and/or
deliver specimens and supplies on a timely basis. Other than the potential
exposures listed above, 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.
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<PAGE>
Completion of the verification portion of Phase 2 did identify that
contingency plans will be needed as it relates to addressing any interruptions
of support provided by third parties resulting from their failure to be Year
2000 ready. In the event that any IRDS systems are found to be non-compliant by
January 1, 2000, the contingency plan will be for such clients to utilize the
Company's standard reporting process via fax and/or mail until the compliance
issue can be addressed. Additional contingency plans will be developed in Phase
3 of the Company's Year 2000 Project as described above. 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 3. 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 June
30, 1999 consisted primarily of debt securities with maturities as long 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 June 30, 1999 and December 31, 1998, there were no
material net unrealized gains or losses on these investments.
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<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 14, 1999, a complaint was filed against the Company in the Denver
County District Court in Colorado by Rocky Mountain Lithotripter Limited
Partnership and RMKSM General Partnership. The suit related to UroCor's
performance under a service agreement with the plaintiffs and the termination of
such agreement in connection with the Company's discontinuation of the USS
business. The plaintiffs claimed damages in excess of $500,000. In May 1999, the
Company settled this claim for $250,000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS:
The effective date of the registration statement for the Company's initial
public offering of Common Stock and for which this use of proceeds information
is being disclosed was May 16, 1996. The Commission file number assigned to the
registration statement was 333-3182.
From the effective date of the registration statement through June 30, 1999,
the following table identifies the purposes and amounts of the net proceeds paid
directly or indirectly to others:
<TABLE>
<S> <C>
Construction of plant, building and facilities............... $ --
Purchase and installation of machinery and equipment......... 6,953,252
Purchases of real estate..................................... --
Acquisition of other business(es)............................ --
Repayment of indebtedness.................................... 2,375,404
Working Capital.............................................. 3,641,287
Temporary Investments:
Short-term Commercial Paper................................ 2,184,180
Long-term Corporate and Treasury Notes..................... 2,845,057
Cash Equivalents........................................... 1,763,225
Other Purposes:
Development and Expansion of Diagnostic Product Line....... 6,231,192
Development of Information Products and Services and
Urological Disease Databases............................. 2,689,673
Development of Therapeutic Product Line.................... 1,924,453
Development and Expansion of Clinical and Research
Laboratories and Lab Information System.................. 3,942,136
</TABLE>
None of the net proceeds have been paid directly or indirectly to directors,
officers, general partners or their associates, to persons owning 10% or more of
any class of equity securities or affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 1999, at the Company's annual meeting of stockholders:
A) The individuals listed below were elected to serve as Class III
directors until the 2002 annual meeting. Set forth is the tabulation of
votes cast.
<TABLE>
<CAPTION>
NAME SHARES VOTED FOR SHARES WITHHELD BROKER NON-VOTES
- ------------------------ ---------------- --------------- -----------------------
<S> <C> <C> <C>
Michael W. George 8,534,940 653,833 0
William A. Hagstrom 8,542,740 646,033 0
Michael E. Herbert 8,543,106 645,667 0
</TABLE>
B) The stockholders approved an amendment to the UroCor, Inc. Second
Amended and Restated 1992 Stock Option Plan, as amended to increase the
number of shares for which options may be granted under such Plan from
2,000,000 to 2,300,000. The tabulation of votes with respect to this item
was as follows:
<TABLE>
<CAPTION>
SHARES VOTED
SHARES VOTED FOR AGAINST SHARES ABSTAINED BROKER NON-VOTES
- ---------------- ------------------- ----------------- -----------------------
<S> <C> <C> <C>
8,003,855 1,174,039 10,879 0
</TABLE>
C) The stockholders approved an amendment to the UroCor, Inc. 1997
Non-Employee Director Stock Option Plan to increase the number of shares for
which options may be granted under such Plan from 100,000 to 200,000. The
tabulation of votes with respect to this item was as follows:
<TABLE>
<CAPTION>
SHARES VOTED
SHARES VOTED FOR AGAINST SHARES ABSTAINED BROKER NON-VOTES
- ---------------- ------------------- ----------------- -----------------------
<S> <C> <C> <C>
8,642,374 532,340 14,059 0
</TABLE>
ITEM 5. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. 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 are
disclosed in statements set forth 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
and such other statements.
CAUTIONARY STATEMENTS
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH. Over the last several years,
the Company has experienced substantial growth and expanded its operational
capabilities. The Company also is 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.
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<PAGE>
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 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 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 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 Civil Investigative Demand ("CID") from
the Department of Justice ("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 both CIDs and is cooperating fully with the DOJ at this stage in the
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
17
<PAGE>
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 could 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 the Department of Health
and Human Services ("DHHS") or any state or any other regulatory authority,
could 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.
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 could 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 clearance 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
18
<PAGE>
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 product not presently widely accepted for
reimbursement within the healthcare market. The product has been marketed for
less than one year and remains a relatively new approach to treating
incontinence. 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 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 Balanced Budget Act 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, could 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 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.
19
<PAGE>
UNCERTAINTIES RELATED TO THE FDA REVIEW OF THERAPEUTIC PRODUCTS. The
Company has a distribution agreement with BioChem Vaccines, Inc. ("BioChem"), a
subsidiary of BioChem Pharma, Inc., for a therapeutic product for use in
treating certain types of bladder cancer. Pursuant to the distribution
agreement, BioChem is responsible for obtaining clearance 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, resulting FDA Form 483 and subsequent discussions between
BioChem and the FDA, BioChem has undertaken upgrading certain portions of its
manufacturing process and facility to meet FDA requirements. BioChem has advised
the Company that it believes it can satisfy the FDA requirements and receive FDA
clearance in 1999, however, there can be no assurance that FDA clearance will be
obtained.
The Company also has a marketing agreement with the manufacturer of a
therapeutic product used for early stage prostate cancer. Pursuant to the
marketing agreement, the manufacturer filed a Form 510(k) with the FDA in
December 1998 for marketing clearance and such clearance was obtained in April
1999. The manufacturer is responsible for obtaining an additional approval from
the Nuclear Regulatory Commission ("NRC") before commercial shipment of the
product can begin. There can be no assurance that such approval will be
obtained. Additionally, as the manufacturer has not previously produced this
therapeutic product, there can be no assurance of the manufacturer's ability to
produce quantities effectively or in a manner compliant with all FDA and NRC
regulations.
UNCERTAINTIES RELATED TO 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 it had not sent
invoices timely to certain patients, primarily managed care patients, for
certain co-pays, deductibles 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 delay in sending such invoices, the
Company has had 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
unsent invoices, it is has undertaken additional initiatives to further improve
claims efficiencies and collection results, in addition to assessing the
ultimate collectibility of outstanding balances. While the Company's management
believes it has made progress by reorgainizing and streamlining its accounts
receivable and billing functions, and 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 a material adverse affect on the Company's results of operations.
NO ASSURANCE OF SUCCESSFUL MARKETING ARRANGEMENTS FOR THERAPEUTIC
PRODUCTS. The Company conducts marketing activities for therapeutic products
through its UroTherapeutics Group. The Company currently has acquired
distribution or co-promotion rights for five therapeutic products. While the
Company has experience marketing three 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 or medical devices from
others.
20
<PAGE>
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 or medical devices on acceptable terms, if at all. The failure
to acquire, license, co-promote or market commercially successful
pharmaceuticals or medical devices 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 or medical
device 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.
Effective January 1, 1999, UroCor and Zeneca revised an existing
co-promotion agreement with a revised three-year co-promotion agreement.
Pursuant to the revised agreement, UroCor recognizes revenue based on completed
sales calls and has the potential to recognize a bonus based on the attainment
of Zeneca's sales goals at year end. Because of changes in the criteria 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 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. For the three months ended June
30, 1999, the Company recorded revenues of $455,000 under this agreement as
compared to $1.1 million in the same period of 1998.
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 clearance 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.
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 1998 third quarter, the Company has incurred severance and
other expenses, including settlement costs related to the lawsuit described in
Part II, Item 1, of this report filed by a physician group in respect of the USS
business. The Company believes it has accounted for all 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 could 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.
21
<PAGE>
RISKS ASSOCIATED WITH DEVELOPMENT OF DATABASES. The confidentiality of
patient medical records is subject to substantial regulation by state and
federal governments. State and federal laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Legislation governing the dissemination and use of medical record information is
being proposed continually at both the state and federal levels. For example,
the Health Insurance Portability and Accountability Act ("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 also are 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 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 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
22
<PAGE>
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 of the
Company's competitors 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 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 a timely basis or on acceptable terms.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K
None.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
UROCOR, INC.
By: /s/ WILLIAM A. HAGSTROM
-----------------------------------------
July 30, 1999 William A. Hagstrom
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
By: /s/ BRUCE C. HAYDEN
-----------------------------------------
Bruce C. Hayden
July 30, 1999 SENIOR VICE-PRESIDENT, CHIEF FINANCIAL
OFFICER,
TREASURER AND SECRETARY
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET FOR JUNE 30, 1999 AND THE STATEMENT OF OPERATIONS FOR THE
SIX MONTH PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,965,633
<SECURITIES> 2,184,180
<RECEIVABLES> 20,713,060
<ALLOWANCES> 10,338,913
<INVENTORY> 782,799
<CURRENT-ASSETS> 30,002,152
<PP&E> 15,189,644
<DEPRECIATION> 6,639,435
<TOTAL-ASSETS> 44,130,532
<CURRENT-LIABILITIES> 4,272,837
<BONDS> 0
0
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<COMMON> 105,419
<OTHER-SE> 39,635,793
<TOTAL-LIABILITY-AND-EQUITY> 44,130,532
<SALES> 0
<TOTAL-REVENUES> 23,572,217
<CGS> 0
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<INTEREST-EXPENSE> 18,124
<INCOME-PRETAX> (6,500,448)
<INCOME-TAX> (2,249,965)
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