-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CI/EqX3auNsiMQ3IxEfSJ70noYEHgbfrwllA1FEC2GO8y1A4K2ceysNrcW7wMJWT u/Keei5wAZ3YZI/YzrJnRA== 0000912057-99-006009.txt : 19991117 0000912057-99-006009.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UROCOR INC CENTRAL INDEX KEY: 0000946945 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 752117882 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28328 FILM NUMBER: 99754460 BUSINESS ADDRESS: STREET 1: 800 RESEARCH PARKWAY CITY: OKLAHOMA CITY STATE: OK ZIP: 73104 BUSINESS PHONE: 4052904000 MAIL ADDRESS: STREET 1: 800 RESEARCH PKWY CITY: OKLAHOMA CITY STATE: OK ZIP: 73104 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 SEPTEMBER 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 (zip code) offices)
(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 November 10, 1999 was 9,226,315 shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UROCOR, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 INDEX PART I--FINANCIAL INFORMATION
PAGE -------- Item 1. Financial Statements (Unaudited) Balance Sheets as of September 30, 1999 and December 31, 3 1998...................................................... Statements of Operations for the three and nine months ended 4 September 30, 1999 and 1998............................... Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............................... 5 Notes to Unaudited Interim Financial 6-7 Statements;mdaSeptember 30, 1999.......................... Item 2. Management's Discussion and Analysis of Financial Condition 8-15 and Results of Operations................................. Item 3. Quantitative and Qualitative Disclosures About Market 15 Risks..................................................... PART II--OTHER INFORMATION Item 1. Legal Proceedings........................................... 16 Item 2. Changes in Securities and Use of Proceeds................... 16 Item 3. Defaults Upon Senior Securities............................. 16 Item 4. Submission of Matters to a Vote of Security Holders......... 16 Item 5. Other Information .......................................... 16-24 Cautionary Statements Item 6. Exhibits and Reports on Form 8-K............................ 24 Signatures.......................................................................... 25
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UROCOR, INC. BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 -------------- ------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 9,559,855 $ 11,034,122 Short-term marketable investments......................... 3,384,699 6,057,160 Accounts receivable, net of allowance for doubtful accounts of $4,934,252 at September 30, 1999 and $6,029,066 at December 31, 1998.................................................... 10,530,128 15,964,744 Prepaid expenses.......................................... 245,035 946,403 Laboratory supplies, at average cost...................... 575,195 458,569 Inventory................................................. 211,045 236,328 Deferred tax asset - current, net......................... 5,252,868 3,159,855 Other current assets...................................... 673,263 1,065,909 ------------ ------------ Total current assets.................................. 30,432,088 38,923,091 ------------ ------------ LONG-TERM MARKETABLE INVESTMENTS............................ 1,824,638 2,112,333 PROPERTY AND EQUIPMENT, net................................. 9,124,650 9,969,245 NON-CURRENT DEFERRED TAX ASSET, net......................... 247,630 174,671 INTANGIBLES AND OTHER ASSETS, net........................... 2,755,869 2,140,599 ------------ ------------ Total assets.......................................... $ 44,384,875 $ 53,319,939 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 3,515,777 $ 3,490,381 Accrued compensation...................................... 634,926 404,444 Current installments of obligations under capital leases.................................................. 32,373 209,092 Other accrued liabilities................................. 227,725 372,427 ------------ ------------ Total current liabilities............................. 4,410,801 4,476,344 DEFERRED COMPENSATION....................................... 186,401 -- OBLIGATIONS UNDER CAPITAL LEASES, net of current installments.............................................. -- 8,607 ------------ ------------ Total liabilities..................................... 4,597,202 4,484,951 ------------ ------------ STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, authorized 6,000,000 shares at September 30, 1999 and at December 31, 1998; no shares issued and outstanding at September 30, 1999 or at December 31, 1998................................. -- -- Common stock, $.01 par value, authorized 20,000,000 shares at September 30, 1999 and at December 31, 1998; 10,654,081 shares issued at September 30, 1999 and 10,492,726 shares issued and outstanding at December 31, 1998....................................... 106,541 104,927 Common stock held in treasury at cost, 976,466 shares..... (5,127,743) -- Additional paid-in capital................................ 59,120,491 58,945,418 Accumulated deficit....................................... (14,311,616) (10,215,357) ------------ ------------ Total stockholders' equity............................ 39,787,673 48,834,988 ------------ ------------ Total liabilities and stockholders' equity............ $ 44,384,875 $ 53,319,939 ============ ============
The accompanying notes are an integral part of these financial statements. 3 UROCOR, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- REVENUE................................... $11,011,169 $11,802,243 $34,583,386 $33,680,084 OPERATING EXPENSES: Direct cost of services and products.... 4,098,764 4,555,023 12,774,138 13,023,472 Selling, general and administrative expenses.............................. 6,417,334 6,048,164 20,040,036 17,548,680 Research and development................ 443,794 531,112 1,251,808 1,538,666 Special charges......................... -- 8,205,606 7,409,777 8,205,606 ----------- ----------- ----------- ----------- Total operating expenses............ 10,959,892 19,339,905 41,475,759 40,316,424 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) 51,277 (7,537,662) (6,892,373) (6,636,340) OTHER INCOME (LOSS): Interest, net........................... 191,138 271,813 677,372 905,176 Other................................... (3,317) (339,125) (46,349) (339,125) ----------- ----------- ----------- ----------- Total other income (loss), net...... 187,821 (67,312) 631,023 566,051 ----------- ----------- ----------- ----------- Income (loss) before income taxes......... 239,098 (7,604,974) (6,261,350) (6,070,289) Income tax provision (benefit)............ 84,879 (2,884,264) (2,165,086) (2,301,264) ----------- ----------- ----------- ----------- NET INCOME (LOSS)......................... $ 154,219 $(4,720,710) $(4,096,264) $(3,769,025) =========== =========== =========== =========== NET INCOME (LOSS) PER SHARE: Basic: Net Income (Loss) Per Common Share...... $ .02 $ (.45) $ (.41) $ (.36) =========== =========== =========== =========== Weighted Average Common and Common Equivalent Shares Outstanding......... 9,663,827 10,422,252 10,076,512 10,382,736 =========== =========== =========== =========== Diluted: Net Income (Loss) Per Common Share-- Assuming Dilution..................... $ .02 $ (.45) $ (.41) $ (.36) =========== =========== =========== =========== Weighted Average Common and Common Equivalent Shares Outstanding--Assuming Dilution.............................. 10,105,526 10,422,252 10,076,512 10,382,736 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 4 UROCOR, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(4,096,264) $(3,769,025) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........................... 2,101,835 1,951,514 Deferred income tax..................................... (2,165,086) (2,307,000) Stock option compensation expense....................... 6,864 93,085 Deferred compensation................................... 186,401 -- (Gain) loss on disposition of equipment................. 46,349 (3,380) Loss on asset write down................................ 3,226,846 2,020,204 Changes in assets and liabilities: (Increase) decrease in accounts receivable.............. 5,434,616 (722,273) Decrease in prepaid expense............................. 701,368 196,808 Increase in laboratory supplies......................... (116,626) (63,410) (Increase) decrease in inventory........................ 25,283 (224,562) (Increase) decrease in other current assets............. 392,646 (550,927) Increase in accounts payable............................ 25,396 804,316 Increase in accrued compensation........................ 230,482 81,090 Increase (decrease) in accrued liabilities.............. (144,702) 772,476 ----------- ----------- Net cash provided by (used in) operating activities... 5,855,408 (1,721,084) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities of short-term marketable investments, net.... 2,672,461 10,632,958 Maturities (purchases) of long-term marketable investments, net...................................... 287,695 (114,684) Capital expenditures.................................... (4,454,706) (3,898,862) Intangibles and other assets............................ (691,880) (277,871) ----------- ----------- Net cash provided by (used in) investing activities... (2,186,430) 6,341,541 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from employee stock purchase plan.............. 63,065 103,434 Purchase of treasury shares............................. (5,127,743) -- Proceeds from exercise of stock options................. 106,758 139,415 Principal payments under capital lease obligations and other indebtedness.................................... (185,326) (358,773) ----------- ----------- Net cash used in financing activities................. (5,143,246) (115,924) ----------- ----------- Net increase (decrease) in cash and cash equivalents........ (1,474,268) 4,504,533 CASH AND CASH EQUIVALENTS, beginning of year................ 11,034,123 6,896,033 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period.................... $ 9,559,855 $11,400,566 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................. $ 10,187 $ 38,073 Cash paid for income taxes.............................. $ 300,000 $ 550,000
The accompanying notes are an integral part of these financial statements. 5 UROCOR, INC. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 nine-month period ended September 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: 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 ==========
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 in the second quarter of 1999. 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 totaled $226,098 and $131,392 remains accrued as of September 30, 1999 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. The majority of these amounts are anticipated to be paid by the end 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 UROCOR, INC. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SEPTEMBER 30, 1999 NOTE 3--NET INCOME (LOSS) PER COMMON SHARE: For the nine months ended September 30, 1999 and the three and nine months ended September 30, 1998, 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 September 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 September 30, 1999, there was not a material net unrealized gain or loss on these investments. NOTE 5--COMMITMENTS AND CONTINGENCIES: 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--SUBSEQUENT EVENT: Effective October 26, 1999, William A. Hagstrom resigned as Chief Executive Officer of the Company, and the Board of Directors elected Michael W. George, formerly Chief Operating Officer, as successor to Mr. Hagstrom as Chief Executive Officer. Mr. Hagstrom will continue as an employee of the Company and as Chairman of the Board through December 31, 1999. The Board of Directors and Mr. Hagstrom have agreed that Mr. Hagstrom will continue to serve the Company in a consulting capacity for a period subsequent to his employment for compensation comparable to his current annual base salary of $248,500, subject to discussion and agreement regarding the terms of such engagement. The Company intends to finalize the terms of the engagement in the fourth quarter of 1999. NOTE 7--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 November 10, 1999, the Company had repurchased approximately $6.7 million (or approximately 1.4 million 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 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 nine months ended September 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 nine months ended September 30, 1999, approximately 47%, 44%, 5% 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 nine months ended September 30, 1999, the Company derived approximately 6% of its revenue from the marketing of two therapeutic products for advanced prostate cancer including a one-time termination fee of $500,000 pursuant to a co-promotion agreement with a manufacturer. Under this agreement, the Company recognizes revenue when earned based primarily on completed sales calls. Pursuant to a termination notice received from the manufacturer in September 1999, this agreement will terminate effective December 31, 1999; the termination notice will not affect the Company's ability to recognize revenue under this agreement in the 1999 fourth quarter. The Company also has worldwide marketing and distribution rights for ProstaSeed-TM-, 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 (the "NRC") before manufacturing and commercial shipment of seeds can begin. The Company expects to begin marketing this product in the United States in the fourth quarter of 1999. Additionally, the Company has distribution rights to a therapeutic product for use in treating certain types of bladder cancer. The manufacturer of the product is awaiting clearance by the FDA prior to marketing in the United States, and has advised the Company that it expects to receive such clearance before the end of 1999. If FDA clearance is obtained in 1999, the Company expects to begin marketing this product in the first quarter of 2000. RESULTS OF OPERATIONS REVENUE. Revenue decreased 6.7%, from approximately $11.8 million to $11.0 million for the three months ended September 30, 1998 compared to the three months ended September 30, 1999, and 8 increased 2.7%, from approximately $33.7 million for the first nine months of 1998 to $34.6 million in the first nine months of 1999. Diagnostics revenue decreased 3.0% for the 1999 three-month period resulting from a decrease in case volume of 1.0% and a 2.3% decrease in overall average unit price. Diagnostic revenue increased 9.5% for the 1999 nine-month period resulting primarily from a 13.5% increase in case volume, offset by a 3.3% decrease in overall average unit price. The main contributor to the decreases in overall average unit price was the higher volume growth for lower priced products, including stones and microbiology, than in most of the Company's other higher priced products. The diagnostics volume decline for the third quarter of 1999 was primarily the result of the second quarter 1999 elimination of certain managed care related marketing programs and related collection efforts that resulted in the loss of some clients and decreased product usage from other clients. In the 1999 third quarter, the Company's client base was approximately 2,620 urologists of which 48% used two or more products compared to 2,650 urologists and 48% for the second quarter of 1999 and 2,500 urologists and 50% for the third quarter of 1998. The Company intends to focus its marketing and sales efforts for the remainder of 1999 on improving the diagnostics growth rates and shifting the product mix to its most profitable products. Therapeutics product revenue decreased 26.2% from approximately $1.3 million for the three months ended September 30, 1998 to approximately $960,000 for the three months ended September 30, 1999, and decreased 43.8% from approximately $3.7 million for the nine months ended September 30, 1998 to approximately $2.1 million in the nine months ended September 30, 1999 principally due to a restructuring of the compensation terms of the related co-promotion agreement effective January 1, 1999. Therapeutics product co-promotion revenue for the three months ended September 30, 1999 included a $500,000 early termination fee that became payable before March 2000 by the manufacturer pursuant to the terms of the co-promotion agreement. Payment of the fee was triggered by the manufacturer's delivery of notice in September 1999 of termination without cause of the agreement effective December 31, 1999, which will not affect the Company's ability to recognize revenue under this agreement in the 1999 fourth quarter. Therapeutic revenues for 2000 and subsequent periods are contingent upon the launch of products that are currently awaiting regulatory approvals and any future acquisition of rights to other therapeutic products that could be marketed by the Company. DIRECT COST OF SERVICES AND PRODUCTS. As a percentage of revenue, direct expenses decreased to 37.2% for the three months ended September 30, 1999 from 38.6% for the three months ended September 30, 1998 and decreased to 36.9% for the nine months ended September 30, 1999 from 38.7% for the nine months ended September 30, 1998. In the aggregate, direct cost of services and products decreased 10.0%, from approximately $4.6 million in the three months ended September 30, 1998 to approximately $4.1 million in the three months ended September 30, 1999 and decreased 1.9% in the aggregate from approximately $13.0 million for the nine months ended September 30, 1998 to approximately $12.8 million for the nine months ended September 30, 1999. Direct costs for the three and nine month periods ended September 30, 1998 included approximately $347,000 and $772,000, respectively, for nonrecurring direct costs associated with the Urology Support Services ("USS") business that the Company exited in late 1998. As a percentage of revenue, direct costs for the three and nine month periods ended September 30, 1998, excluding the direct costs associated with USS would have been 35.7% and 36.4%, respectively. Compared to these adjusted percentages for the 1998 periods, direct costs for the comparable 1999 three-month period increased from 35.7% to 37.2% and increased from 36.4% to 36.9% for the comparable 1999 nine-month period. The increase in this percentage for the 1999 three-month and nine-month periods compared to the adjusted 1998 three-month and nine-month periods 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 58.3% for the three months ended September 30, 1999 from 51.2% for the three months ended September 30, 1998 and increased to 57.9% for the nine months ended September 30, 1999 from 52.1% for the nine months ended September 30, 1998. In the aggregate, selling, 9 general and administrative expenses increased 6.1%, from approximately $6.0 million in the three months ended September 30, 1998 to approximately $6.4 million in the three months ended September 30, 1999 and increased 14.2%, from approximately $17.5 million in the nine months ended September 30, 1998 to $20.0 million in the nine months ended September 30, 1999. Selling, general and administrative expenses for the three and nine month periods ended September 30, 1998 included approximately $144,000 and $497,000, respectively for nonrecurring costs associated with the USS business that the Company exited in late 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 $460,000 and $877,000 for the three and nine months ended September 30, 1999 related to personnel, marketing and information systems in anticipation of the upcoming launch of the Company's ProstaSeed-TM- product. RESEARCH AND DEVELOPMENT EXPENSES. As a percentage of revenue, research and development expenses decreased to 4.0% for the three months ended September 30, 1999 from 4.5% for the three months ended September 30, 1998 and to 3.6% for the nine months ended September 30, 1999 from 4.6% for the nine months ended September 30, 1998. In the aggregate, research and development costs decreased 16.4%, from approximately $531,000 in the three months ended September 30, 1998 to approximately $444,000 in the three months ended September 30, 1999, and decreased 18.6% from approximately $1.5 million for the nine months ended September 30, 1998 to approximately $1.3 million in the nine months ended September 30, 1999. 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, the Company terminated certain managed care related marketing programs and identified significantly aged segments of its accounts receivable for which the likelihood of collectibility was 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 nine months ended September 30, 1999. Aggregate special charges for the three and nine months ended September 30, 1998 were approximately $8.2 million, including $4.7 million in accounts receivable provision, approximately $2.2 million in exit costs related to USS and approximately $1.3 million in non-strategic program asset write-offs, severance and other restructuring costs. The following table sets forth the effects of the special charges and the 1998 operating losses of USS on UroCor's operating income for the three and nine month periods ended September 30, 1999 and 1998.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ------------------------- 1999 1998 1999 1998 -------- ----------- ----------- ----------- Operating income (loss), as reported............................ $51,277 $(7,537,662) $(6,892,373) ($6,636,340) Operating income, excluding special charges and USS operating loss...... $51,277 $ 1,074,432 $ 517,404 $ 2,721,438
10 OTHER INCOME (EXPENSE). Interest income net of interest expense decreased 29.7%, from approximately $272,000 in the three months ended September 30, 1998 to approximately $191,000 in the three months ended September 30, 1999 and decreased 25.2%, from approximately $905,000 in the nine months ended September 30, 1998 to approximately $677,000 in the nine months ended September 30, 1999. This decline was due principally to decreased cash, cash equivalents and investments compared to the 1999 periods, resulting from the use of such resources to fund stock repurchases and capital expenditures. Other expense of approximately $3,000 and $46,000 for the three and nine months ended September 30, 1999 was primarily due to routine disposition of assets. Other expense of approximately $339,000 (the "1998 Non-recurring Expense") for both the three and nine months periods ended September 30, 1998 was primarily due to nonrecurring charges for professional advisor fees related to implementing the Company's stockholder rights plan and review of an unsolicited purported acquisition offer in the third quarter of 1998. The following table sets forth the effects of the special charges, the operating losses of USS in 1998 and the 1998 Nonrecurring Expense on UroCor's net income and earnings per share for the three and nine month periods ended September 30, 1999 and 1998.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ------------------------- 1999 1998 1999 1998 -------- ----------- ----------- ----------- Net income (loss), as reported....... $154,219 $(4,720,710) $(4,096,264) $(3,769,025) Net income, excluding special charges, USS operating losses and 1998 Nonrecurring Expense.......... $154,219 $ 829,046 $ 749,732 $ 2,243,053 -------- ----------- ----------- ----------- Diluted income (loss) per share, as reported........................... $ .02 $ (.45) $ (.41) $ (.36) Diluted income per share, excluding special charges, USS operating losses and 1998 Nonrecurring Expense............................ $ .02 $ .08 $ .07 $ .22
INCOME TAXES. Income tax benefit recorded in the three months ended September 30, 1998 was approximately $2.9 million while an income tax expense of approximately $85,000 was recorded in the three months ended September 30, 1999 based on a 35.5% effective federal and state income tax rate. For the nine months ended September 30, 1998, income tax benefit of approximately $2.3 million was recorded based upon a 38% effective rate, while an income tax benefit of $2.2 million was recorded for the nine months ended September 30, 1999. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, cash, cash equivalents and marketable investments totaled approximately $14.8 million and the Company's working capital was approximately $26.0 million. As of September 30, 1999, the components of cash, cash equivalents and marketable investments were cash and cash equivalents of approximately $9.6 million and short-term and long-term marketable investments of approximately $3.4 million and $1.8 million, respectively, consisting 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 $10.5 million at September 30, 1999, a decrease of approximately $5.4 million from December 31, 1998, or 34.0%. This decrease was principally attributable to improved collections and the special charge for additional bad debt recorded in the second quarter. At September 30, 1999 and December 31, 1998, the Company's average number of days sales in net diagnostics receivables was approximately 89 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 11 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 was 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. Also in 1998, the Company 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 September 30, 1999, the Company recorded revenue of approximately $459,000 and a nonrecurring fee of $500,000 as a result of early termination under the agreement, as compared to $1.3 million revenue for the three months ended September 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 in the fourth quarter if certain sales goals are attained. In September 1999, the manufacturer sent the Company a notice of termination without cause of the agreement effective December 31, 1999, which will not affect the Company's ability to earn revenue under this agreement in the 1999 fourth quarter. Therapeutic revenues for 2000 and subsequent periods are contingent upon the launch of products that are currently awaiting regulatory approvals and any future acquisition of rights to other therapeutic products that could be marketed by the Company. Operating activities provided net cash of approximately $5.9 million for the nine months ended September 30, 1999 compared to using net cash of approximately $1.7 million for the nine months ended September 30, 1998. The net cash provided by operating activities was primarily the result of a net loss of $4.1 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 in the second quarter, a decrease in accounts receivable of approximately $5.4 million resulting from increased collections and a special charge in the second quarter, depreciation and amortization of approximately $2.1 million and a decrease in prepaid assets of approximately $701,000. Net cash used by investing activities was approximately $2.2 million for the nine months ended September 30, 1999 and consisted primarily of maturities of short- and long-term marketable investments 12 of approximately $3.0 million, offset by capital expenditures of approximately $4.5 million and intangible and other assets of approximately $692,000 related to progress payments for marketing distribution rights. Net cash used in financing activities was approximately $5.1 million for the first nine 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 $4.5 million for the nine months ended September 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 $351,000 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 nine months ended September 30, 1999, expects to incur at least an additional $460,000 by the end of the fourth 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 comparable to current levels 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 $350,000 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. In July 1999, the Company advanced one manufacturer $150,000 towards the next milestone. 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 November 10, 1999, the Company had repurchased approximately $6.7 million (or approximately 1.4 million 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 13 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: 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: 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 was completed in the third quarter of 1999. Phase 3: 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. The Company previously expected to complete this phase for its internal systems by the end of the 1999 third quarter, however, due to an August 1999 decision on systems replacements for its laboratory and billing systems, the Company has identified and commenced certain additional remediation efforts on existing systems. The Company has added this additional remediation work to the existing plan and has engaged additional resources to perform the necessary programming and testing. It is anticipated that this phase will now be completed by mid-December 1999 for the Company's internal systems. Contingency planning for the Company's internal systems and processes is being facilitated by the internal task force working in conjunction with all applicable departments to identify possible Year 2000 impacts and documenting how such impacts will be dealt with. This documentation process will be on-going through the end of 1999, with the most significant risk areas being concentrated upon and documented first. The resolution of Year 2000 issues for computer systems utilized in client's offices for the Company's Internet Report Delivery System ("IRDS") has been 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 on-going process as the Company becomes aware of such issues and will be taken into account in the contingency planning for internal systems and processes, as applicable. In 1998, UroCor's initial assessment of its internal computer systems and related applications indicated that these systems and applications were prepared to accommodate date-sensitive information relating to the Year 2000 issue. Despite the delay in complete remediation for internal systems discussed under Phase 3 above, UroCor expects that any additional costs related to ensuring its 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. As of September 30, 1999, the Company estimates that it has spent approximately $80,000 specifically relating to the Year 2000 project. 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 $230,000. 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. 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 14 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. 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. The Company expects to develop additional contingency plans in Phase 3 as 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 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 September 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 September 30, 1999 and December 31, 1998, there were no material net unrealized gains or losses on these investments. 15 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS USE OF PROCEEDS: The effective date of the registration statement for the Company's initial public offering of Common Stock and for which this use of proceeds information is being disclosed was May 16, 1996. The Commission file number assigned to the registration statement was 333-3182. From the effective date of the registration statement through September 30, 1999, the following table identifies the purposes and amounts of the net proceeds paid directly or indirectly to others: 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............................... 2,378,854 Long-term Corporate and Treasury Notes.................... 2,830,483 Cash Equivalents.......................................... 922,293 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................... 2,585,285 Development and Expansion of Clinical and Research Laboratories and Lab Information System................. 3,942,136
None of the net proceeds have been paid directly or indirectly to directors, officers, general partners or their associates, to persons owning 10% or more of any class of equity securities or affiliates. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 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 16 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 in its diagnostics services business and expanded its operational capabilities. The Company also intends to develop further and expand its therapeutic products business and to offer additional information services products. 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 successfully the operation and expansion of its 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 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 17 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 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 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 18 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. The FDA also regulates the introduction, manufacturing, labeling and recordkeeping of the Company's therapeutic products currently marketed or that the Company may market in the future. In addition, most users of the Company's ProstaSeed-TM- product that the Company expects to market in the future will be required to possess licenses issued by the state in which they reside or by the NRC. 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 Company's Persist Treatment System product currently is not 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 such products' 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. 19 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. UNCERTAINTIES RELATED TO THE REGULATORY 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, since 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 20 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 markets three products and has acquired distribution rights for two other therapeutic products, and, pursuant to the manufacturer's September 1999 notice of termination without cause, effective December 31, 1999, the Company will no longer market two of the products it currently markets. 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. 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. 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. Additionally, the Company has not previously marketed to the radiation oncology and medical oncology markets that will be pursued for sales of the Company's ProstaSeed-TM- product, and there can be no assurance that the Company will be successful in these marketing and sales efforts. In addition, the Company is and will be dependent on third party manufacturers to produce the products that are the subject of the Company's marketing and distribution agreements. If such manufacturers are unable to produce the products, produce adequate quantities or produce them in a manner that is compliant with all regulatory requirements, the Company's marketing and distribution agreements are subject to termination and potential liabilities that could have a material and adverse effect on the Company's financial condition and results of operations. POTENTIAL THERAPEUTICS PRODUCT LIABILITY OR RECALL. In the event UroCor increases its marketing of therapeutic products, it will face 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. 21 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 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 22 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, if 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 has completed an assessment of the ability of its information systems and related applications to accommodate date-sensitive information relating to the Year 2000 issue. A plan has been developed that is designed to remediate all internal systems by the end of 1999, however, there can be no assurance that such remediation efforts will be successful or that the Company will not identify additional 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 23 Company to seek additional financial 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. 24 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. UROCOR, INC. By: /s/ MICHAEL W. GEORGE ----------------------------------------- Michael W. George PRESIDENT AND CHIEF EXECUTIVE OFFICER
November 15, 1999 By: /s/ BRUCE C. HAYDEN ----------------------------------------- Bruce C. Hayden SENIOR VICE-PRESIDENT, CHIEF FINANCIAL OFFICER, TREASURER AND SECRETARY
November 15, 1999 25 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET FOR SEPTEMBER 30, 1999 AND THE STATEMENT OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 9,559,855 3,384,699 15,464,380 4,934,252 786,240 30,432,088 16,442,592 7,317,942 44,384,875 4,410,801 0 0 0 106,541 39,681,132 44,384,875 0 34,583,386 0 12,774,138 22,695,280 6,006,341 23,975 (6,261,350) (2,165,086) (4,096,264) 0 0 0 (4,096,264) (.41) (.41)
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