SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-16177
ONCOR, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1310084
(State of Incorporation) (I.R.S. Employer Identification No.)
209 Perry Parkway
Gaithersburg, Maryland 20877
(Address of principal executive offices)
(Zip code)
(301) 963-3500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $.01 Per Share)
(Title of Class)
Redeemable Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES x NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
At February 28, 1997, there were 25,077,970 shares of Common
Stock outstanding. The aggregate market value of the voting
stock held by non-affiliates was approximately $98,975,914 at
that date. Document incorporated by reference: Proxy Statement
of Oncor, Inc. relative to the Annual Meeting of Shareholders to
be held in July 1997, which is incorporated into Part III of this
Form 10-K.
TABLE OF CONTENTS
PART I
Item Page
1. Business. . . . . . . . . . . . . . . . . . . . . . . .1
2. Properties. . . . . . . . . . . . . . . . . . . . . . .24
3. Legal Proceedings . . . . . . . . . . . . . . . . . . .25
4. Submission of Matters to a Vote of Security Holders . .25
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . .26
6. Selected Consolidated Financial Data. . . . . . . . . .27
7. Management's Discussion and Analysis of
Financial Condition and Results of Operation. . . . . .28
8. Consolidated Financial Statements
and Supplementary Data. . . . . . . . . . . . . . . . .36
9. Changes in and Disagreements on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . .36
PART III
10. Directors and Executive Officers of the Registrant. . .37
11. Executive Compensation. . . . . . . . . . . . . . . . .37
12. Security Ownership of Certain
Beneficial Owners and Management. . . . . . . . . . . .37
13. Certain Relationships and Related Transactions. . . . .37
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . .38
Signatures. . . . . . . . . . . . . . . . . . . . . . .42
PART I
ITEM 1. BUSINESS
THE COMPANY
Oncor, Inc. ("Oncor") and together with its consolidated
subsidiaries (the "Company") was incorporated in Maryland in
July, 1983. Oncor's principal offices are located at 209 Perry
Parkway, Gaithersburg, Maryland 20877, and its telephone number
is (301) 963-3500.
BUSINESS
This Report contains certain statements of a forward-looking
nature relating to future events or the future financial
performance of the Company. Investors are cautioned that such
statements are only predictions and that actual events or results
may differ materially. In evaluating such statements, investors
should specifically consider the various factors identified in
this Report which could cause actual results to differ materially
from those indicated by such forward-looking statements,
including the matters set forth in "Business - Additional Risk
Factors."
The Company develops, produces and markets cancer-oriented
genetic probes, related reagents, molecular biology products, and
diagnostic products. The Company is conducting preclinical
studies for detection tests for certain leukemias, bladder
cancer, lung cancer and certain blood cancers. Oncor is also
developing genetic test systems for the detection and management
of significant life-threatening cancers, including breast cancer,
bladder cancer, lung cancer and certain blood cancers. In
addition to its genetic test systems, the Company currently
manufactures and markets for research purposes nearly 200 genetic
probes to specific human genes, with related reagents and
instrumentation, and a wide array of molecular biology products.
The Company currently sells its products to over 1,700 customers
worldwide.
In February 1994, the Company filed a Premarket Approval
("PMA") application with the United States Food and Drug
Administration (the "FDA") for its Her-2/neu amplification test
system for the characterization of breast cancer. In November
1995, an FDA panel of independent advisors (the "Panel") made a
recommendation against final approval of the Company's PMA
application for the use of its Her-2/neu genetic test system for
diagnostic purposes. In the third quarter of 1996, the Company
received confirmation from the FDA that the agency had accepted
the clinical validity and statistical model for determining the
predictive value of the Her-2/neu test system. The FDA further
indicated that the Company must re-run a sample of previously
examined specimens, undergo a manufacturing site inspection and
develop a physician education and training program. No assurance
can be given that these or other required steps will be
accomplished in a timely fashion or, if such requirements are
accomplished, that the FDA will grant approval of the PMA on a
timely basis, if at all. The failure to obtain FDA approval for
its Her-2/neu genetic test system on a timely basis, or at all,
would have a material and adverse effect on the Company's
business, financial condition and results of operations. In the
event that the Company receives FDA approval for its Her-2/neu
genetic test system, there can be no assurance that the Company
will be capable of manufacturing the test system in commercial
quantities at reasonable costs or marketing the product
successfully, that the test system will be accepted by the
medical diagnostic community, or that the market demand for the
test system will be sufficient to allow profitable sales.
Oncor's genetic test systems permit the detection of
individual cancer cells at the fundamental genetic level, as
distinct from conventional forms of analysis which detect the
large cancer cell populations that result from the progression of
the disease. In addition, genetic test systems can be used to
characterize a cancer cell's origin or type, thereby facilitating
the selection of the appropriate treatment modality. As a
result, Oncor's genetic test systems may be useful throughout the
cycle of cancer management from initial screening for
predisposition to cancer, through detection and typing of cancer
and selection of therapy, to monitoring of treatment and
detection of residual disease or relapse.
The Company has established agreements with numerous
academic and research institutions which provide (or have
provided) the Company with certain exclusive commercial rights to
inventions relating to specific genes and other genetic
technologies. These institutions include The Johns Hopkins
University School of Medicine ("Johns Hopkins"), University of
Helsinki, University of Chicago, The Children's Hospital of
Philadelphia, Yale University, Tel Aviv University's Sackler
School of Medicine, the Massachusetts General Hospital,
University of Utah and Princeton University.
Products
The Company's principal products include: (1) integrated
genetic test systems containing one or more genetic probes (also
sold separately) together with the reagents, slides and other
materials necessary to perform genetic analysis, and (2)
molecular biology reagents, enzymes and instruments. The Company
also sells the individual genetic test system components as
required by its customers. The Company's genetic test systems
generally incorporate in situ hybridization techniques.
Enhancing the speed and reliability of these techniques and
developing novel succeeding technologies have been major focuses
of the Company.
The Company's products are currently sold in the United
States for research purposes only and, accordingly, do not
require approval or clearance by the FDA or by any similar
foreign authority. However, the Company plans to obtain FDA
approval for the clinical use of a number of these products. No
assurance can be given that the Company will obtain FDA approval
for any of its products.
In July 1996, the Company announced a plan to discontinue or
suspend the development, manufacture and marketing of certain
products in certain geographic regions in which net margins for
these products in these regions historically have been low. Such
products and regions included the entire biological imaging
product line and much of the products developed and manufactured
by Appligene S.A., the Company's European operating subsidiary
("Appligene") as they relate to sale in the United States. In
addition, the Company has suspended the manufacture and marketing
of its B/T Blue Gene Rearrangement Test System (B/T Blue) in
order to complete the reconfiguration of the product and the
submission of the required documentation with the FDA. The
Company also has obtained an extension of its current PMA filing
at the FDA for its leukemia detection test for Chronic
Myelogenous Leukemia ("CML"), in order to (i) respond to
questions provided by the FDA and (ii) consider the possible
reconfiguration of the test system and resubmission of the PMA.
With respect to the B/T Blue and CML test systems, the Company
cannot predict when or if it will complete these reconfigurations
and submissions, or that, if such submissions would receive FDA
approval on a timely basis, if at all.
Through its in-house research and development efforts, along
with collaborations with human genome research centers, Oncor has
assembled, and is developing, a portfolio of genetic test systems
and enabling technologies. Set forth below are descriptions of
the Company's principal genetic test systems and related products
currently being sold or under development.
Breast Cancer
The Company has developed a genetic test system to identify
Her-2/neu gene amplification, an independent marker of breast
cancer aggressiveness. The Company believes the presence of
Her-2/neu amplification is indicative of clinically aggressive
breast cancer, even in apparent localized tumors, requiring more
aggressive treatment than localized breast cancer tumors.
The Company has completed clinical trials of its Her-2/neu
amplification test system for breast cancer and filed a PMA
application in February 1994. In November 1995, the Panel
reviewed the PMA and made a recommendation against final approval
of the Company's PMA application for the use of its Her-2/neu
genetic test system for diagnostic purposes. In the third
quarter of 1996, the Company received confirmation from the FDA
that the agency had accepted the clinical validity and
statistical model for determining the predictive value of the
test system. The FDA further indicated that the Company must
re-run a sample of previously examined specimens, undergo a
manufacturing site inspection and develop a physician education
and training program. No assurance can be given that these or
other required steps will be accomplished in a timely fashion or,
if they are, that the FDA will grant approval of the PMA
applications. The failure to obtain FDA approval for its
Her-2/neu genetic test system on a timely basis, or at all, would
have a material and adverse effect on the Company's business,
financial condition and results of operations. In the event that
the Company receives FDA approval for its Her-2/neu genetic test
system, there can be no assurance that the Company will be
capable of manufacturing the test system in commercial quantities
at reasonable costs or marketing the product successfully, that
the test system will be accepted by the medical diagnostic
community, or that the market demand for the test system will be
sufficient to allow profitable sales. The Company has recently
received approval to market its Her-2/neu genetic test system for
diagnostic use in Australia, Austria, Canada, Denmark, Germany,
Ireland, Luxembourg, The Netherlands, Sweden, Switzerland and the
United Kingdom and expects to commence marketing for diagnostic
purposes in certain selected of these countries in the first half
of 1997.
In addition, the Company has obtained an exclusive world-wide
license from and entered into a sponsored research agreement
with Tel Aviv University's Sackler School of Medicine ("Sackler")
with respect to the development of methods for the detection of
minute quantities of p43 antigen in human blood. The Company and
Sackler believe that the presence of this antigen may indicate
the early onset of breast cancer, and possibly other cancers.
Sackler continues research on the technology and the Company is
undertaking pre-clinical test development with respect to the
technology at Albany (NY) University School of Medicine.
Cervical Cancer
The Company has developed a test system for the detection of
certain strains of Human Papilloma Virus ("HPV") in cervical
tissue samples. Such strains of HPV are widely believed to be
linked to the onset of cervical cancer. The Company filed a PMA
application with and received a letter of approvability from the
FDA with respect to the test system. The Company thereafter has
reconfigured the test system to facilitate automation and
integration of the test with automated Pap Smear testing.
Pursuant to this reconfiguration, the Company will be required,
among other things,to conduct additional clinical trials and
refile its PMA application. The Company currently is seeking to
establish a cooperative arrangement with one or more companies
involved in providing the capability for automated Pap Smear
testing. There can be no assurance that such PMA will be filed
on a timely basis, if at all, or if so filed, will be approved by
the FDA on a timely basis, if at all. Furthermore, there can be
no assurance that the Company will be successful in securing a
cooperative arrangement with respect to the further development,
testing and filing requirements for the test. The Company
believes that it could not successfully undertake development of
an automated and integrated HPV test system in the absence of
such a cooperative agreement.
Bladder Cancer
The Company has acquired exclusive rights to certain
published technologies from Johns Hopkins which the Company
believes may be beneficial in developing a bladder cancer
screening test. Johns Hopkins has filed U.S. and foreign patent
applications relating to this technology. There can be no
assurance that patents will issue as a result of any such pending
applications or that, if issued, such patents will be
sufficiently broad to afford protection against competitors with
similar technology. In addition, there can be no assurance that
any patents issued to the Company, or for which the Company has
license rights, will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. Plans are in progress to
incorporate these technologies into preclinical and clinical
trials.
Lung Cancer
The Company and Johns Hopkins are actively pursuing the
discovery of genetic changes associated with the early detection
of lung cancer under a collaboration research and licensing
agreement. The objective is the development of a method to
detect the associated specific genetic events in sputum samples
at an early stage. In October 1996, U.S. Patent No. 5,561,041
was issued to Johns Hopkins which relates to this technology,
which is licensed exclusively to the Company.
Breast, Prostate and Colon Cancer Molecular Staging Assay
In March 1994, the Company acquired an exclusive worldwide
license from Johns Hopkins for a test that will detect small
numbers of metastatic cancer cells in surgical sections and lymph
nodes. Johns Hopkins has filed U.S. and foreign patent
applications for this technology. There can be no assurance that
patents will issue as a result of any such pending applications
or that, if issued, such patents will be sufficiently broad to
afford protection against competitors with similar technology.
In addition, there can be no assurance that any patents issued to
the Company, or for which the Company has license rights, will
not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide competitive advantages to
the Company. The test is more sensitive than current methods and
could have broad-based implications in the staging and management
of all solid tumors. The test is being developed by OncorMed,
Inc. ("OncorMed"), the Company's medical services affiliate, for
application in the detection and management of breast, colon and
prostate cancers.
TriAmp(TM) Amplification Technology
The Company has developed a proprietary technology for the
targeted amplification of DNA sequences. The technology is a
continuous chemical reaction in which a copy of a small fragment
of the target DNA is reproduced in a geometric fashion with an
objective of detecting gene mutations in samples too small to
allow detection using current technologies. A U.S. patent
relating to the technology was issued in January 1997.
Sunrise Primers and Rolling Circle Amplification
The Company has developed a family of proprietary
technologies for the direct, quantitative analysis of nucleic
acid amplification reactions. Certain of these technologies
permit real-time quantitation of nucleic acid amplification
techniques in a closed-tube format without the need for any
post-amplification steps. The Company plans to begin marketing
this new technology for research use only in the first half of 1997.
Two U.S. patent applications relating to the technologies are
pending.
Methylation
The Company has licensed exclusively from Johns Hopkins a
proprietary technology for determining the methylation status of
specific genes. A U.S. patent application relating to the
technology is pending. The expression of certain cancer related
genes, including certain tumor suppressor genes and cell life
cycle genes, is known to be influenced by the methylation status
of certain regions within the genes. Oncor began marketing, for
research use only, kits to measure methylation status early in
1997.
Other Products
In addition to the genetic test systems for specific cancers
and genetic diseases, the Company currently manufactures and
sells nearly 200 other genetic probes to specific regions
(chromosomes, loci or genes) for research purposes. In addition
to genetic probes, the Company manufactures and markets for
research purposes reagents and solutions for use in hybridization
procedures, reagents for the extraction of DNA samples from blood
and solid tissue, as well as various DNA labeling kits.
OncorMed
As more fully described in Note 4 to the accompanying
consolidated financial statements, OncorMed, the Company's
medical services affiliate, has completed two public offerings of
its common stock, first in October 1994, then in February 1996.
As a result, the Company's ownership interest was reduced to
approximately 40% of the outstanding common stock in 1995 and 29%
in 1996. Accordingly, OncorMed is no longer a consolidated
subsidiary of the Company. OncorMed continues to develop its
genetic risk assessment, early cancer detection and other genetic
services around technologies developed by OncorMed or licensed
from others, including Oncor.
Codon (formerly known as OncorPharm)
As more fully described in Note 4 to the accompanying
consolidated financial statements, Codon Pharmaceuticals, Inc.
("Codon")(formerly known as OncorPharm, Inc.) the Company's
therapeutic affiliate, completed rounds of private equity
financing in April 1995 and in April 1996. As a result, the
Company's ownership interest was reduced to approximately 42% of
Codon's outstanding capital stock. Accordingly, Codon is no
longer a consolidated subsidiary of the Company. Codon is
undertaking research activities in an effort to develop
gene-repair compounds and other genetic therapies, based on
technologies acquired, directly or indirectly, by exclusive
license from Princeton University, Yale University and Johns
Hopkins.
Appligene
In September 1994, the Company acquired substantially all of
the outstanding capital stock of Appligene. In July 1996,
Appligene completed an initial public offering of its common
stock in France, thereby reducing the Company's ownership
interest to approximately 80%. Appligene develops, manufactures
and markets a variety of molecular biology products, most
significantly restriction enzymes, and markets related apparatus
and equipment. The principal markets for Appligene's products
are in Europe, including the United Kingdom. Oncor markets its
products for research and diagnostic purposes in Europe through
Appligene's direct sales force and distributors.
Research and Development
The Company conducts the majority of its research and
development activities through its own staff and facilities. The
Company currently has 41 employees engaged in research and
development, including 20 with Ph.D.'s. The Company's in-house
research and development efforts are focused primarily on the
development of new genetic test systems, new genetic probes,
probe labeling and detection techniques, reagent chemistries,
sequencing products, amplification methods and cellular rare
event detection.
In addition to its in-house research programs, the Company
collaborates with academic and research institutions to support
research in areas of interest to the Company. In particular, all
of the clinical testing required to support the Company's FDA
approval applications are conducted by outside clinical research
institutions. Typically under these arrangements, the Company's
personnel in conjunction with consultants to the Company
establish a clinical testing protocol, monitor the performance of
the institution in implementing that protocol and, if necessary,
prepare the associated documentation, statistical analysis and
submission of results to the FDA. The Company usually pays the
costs of the outside institution associated with conducting and
reporting the results of the clinical trials.
In addition, the Company occasionally licenses from third
parties the rights to certain genetic probes and other
technologies that it incorporates in its products or uses in its
research and development efforts. See "Business -- Proprietary
Rights and Licenses."
Sales and Marketing
The Company has direct sales forces in Europe and the United
States, aggregating approximately 28 employees, and is supported
by field application specialists and in-house technical services
personnel. The Company currently markets its products through
its sales forces to over 1,700 customers in the United States and
Europe, primarily for research purposes. These customers include
laboratory directors at centers that analyze tumors, genetic
laboratories that perform chromosomal analysis and academic
research laboratories. In other regions of the world, the
Company sells its products through research product distributors.
The list prices of the Company's genetic test systems range from
approximately $15 to $110 per test. The tests are typically
purchased on a recurring basis.
The Company emphasizes the sale of integrated genetic test
systems composed of genetic probes, slides, reagents and other
materials to help assure the performance of the products in the
customer's laboratory. In addition, the Company operates
periodic workshops in which clinicians pay tuition to receive
training in the use of the Company's products for the research
analysis of cancer and genetic diseases.
Manufacturing
The Company currently operates two manufacturing facilities.
One is co-located with its headquarters in Gaithersburg,
Maryland, for the production of commercial quantities of its
genetic test systems and reagents. The second facility is
located in Strasbourg, France for the production of molecular
biology products. The Company maintains its own quality control
laboratories at both sites to assure quality and product
performance.
Competition
Competition in the medical diagnostic and research market is
intense. The Company competes with a large number of companies
ranging from very small businesses to large diagnostic, health
care, pharmaceutical, biotechnology and chemical companies, many
of which have substantially greater financial, manufacturing,
marketing and product research resources than the Company.
Academic institutions, governmental agencies and other public and
private research organizations are also conducting research
activities and may commercialize products on their own or through
joint ventures with competitors. In general, the particular
companies with which the Company competes and the technologies
with which its products compete vary with the Company's different
products and markets. The Company competes primarily on the
basis of the clinical utility, accuracy, speed, ease of use and
other performance characteristics of its products and, to a
lesser degree, on the price of its products.
The largest portion of the cancer diagnostics market to date
has been represented by serum protein assays, which measure the
actual amount of the specific target protein in the blood. Serum
assays are recommended primarily for the monitoring of patients
with known disease. In addition to protein assays, a number of
companies supply antibodies to various cell surface proteins
associated with cancer. Antibody-based cancer diagnostics are
also utilized in conjunction with flow cytometry instrumentation.
The Company is also aware that other companies are likely
developing genetic test systems for diagnostic purposes, which
may be competitive with the Company's existing products and those
under development. In addition, a number of methods currently
exist for gene amplification, including the widely used
polymerase chain reaction ("PCR") process, and the Company is
aware that additional methods are under development by other
companies. These gene amplification methods could compete
directly with the Company's amplification product line. The
existence of these and other competing products or procedures
that may be developed in the future may adversely affect the
marketability of products developed by the Company.
Competition for molecular biology products is intense both
in the United States and Europe, primarily from very large multi-national
corporations.
The Company's competitive position depends, in part, on its
ability to attract and retain qualified scientific and other
personnel, develop effective proprietary products, implement
production and marketing plans, obtain patent or exclusive
licensing protection and obtain adequate capital resources.
Government Regulation
Those of the Company's products that are intended for
research purposes only, as opposed to clinical diagnostic
applications, and which are labeled and sold as such, may
currently be marketed in the United States and most foreign
markets. However, the manufacture, distribution and sale of the
Company's products in the United States for clinical diagnostic
purposes requires prior authorization by the FDA. The FDA and
similar agencies in foreign countries, especially France and
Japan, have promulgated substantial regulations which apply to
the testing, marketing, import, export and manufacturing of
diagnostic products. In order to obtain FDA approval (marketing
clearance) of a new product for diagnostic purposes, the Company
will be required to submit evidence of the safety and efficacy of
the product. Such evidence typically entails extensive clinical
and laboratory tests and demonstrations of compliance with FDA
Good Manufacturing Practices ("GMP") regulations. The testing,
preparation of necessary applications and response to the FDA in
their processing of those applications is expensive and time
consuming.
The clinical testing required of the Company's products is
expected to be significantly less extensive than that typically
required for a therapeutic product. Nevertheless, these clinical
testing protocols may take several months or years to complete,
depending on the nature of the filing. There can be no assurance
that the FDA will act favorably or quickly in making its reviews,
and significant difficulties or costs may be encountered by the
Company in its efforts to obtain FDA approvals that could delay
or preclude the Company from marketing its products for
diagnostic purposes. Furthermore, there can be no assurance that
the FDA will not request the development of additional data
following the original submission. Based upon the data submitted
to it, the FDA may also limit the scope of the labelling,
permitted use of the product or deny the application altogether.
With respect to patented products or technologies, delays imposed
by the governmental approval process may materially reduce the
period during which the Company will have the exclusive right to
exploit those products or technologies.
The Company's diagnostic products, as presently
contemplated, will be regulated as medical devices. Prior to
entering commercial distribution, all of the Company's diagnostic
products must undergo FDA review under one of two basic review
procedures: a Section 510(k) premarket notification ("510(k)") or
PMA application.
After product approvals have been received, they may still
be withdrawn if compliance with regulatory standards is not
maintained or if substantial problems occur after the product
reaches the market. The FDA may require post-marketing
surveillance programs to monitor products which have been
commercialized, and has the power to prevent or limit further
marketing of the products based on the results of these
post-marketing programs. In addition, prior to obtaining FDA
marketing approval for each product, the FDA must, under the
Food, Drug and Cosmetic Act, inspect the manufacturing facilities
and procedures on a routine basis for compliance with its GMP
regulations.
Sales of the Company's products outside the United States
are also subject to extensive regulatory requirements, which vary
widely from country to country. Diagnostic products that have
not been approved by the FDA may be exported for sale outside the
United States only after meeting specific conditions for export
set forth by the FDA. Furthermore, such products may be exported
for use only in certain countries, generally countries within
Europe, Canada, Australia and Japan, and, then, only if the
appropriate regulatory authorities in such countries have
approved such products for use in their respective countries.
The time required to obtain such approval may be longer or
shorter than that required for FDA approval. To date, the
Company has received export approval from the FDA and import
approval from the appropriate foreign regulatory bodies to market
the Company's breast cancer test in Australia, Austria, Canada,
Denmark, Germany, Ireland, Luxembourg, The Netherlands, Sweden,
Switzerland and the United Kingdom.
The Company's products that are being sold for research
purposes only are properly labeled as such, as required by the
FDA. The FDA imposes distribution requirements and procedures
for companies selling "research use only" and "investigational
use only" labeled products and requires that the seller label the
products appropriately and establish that the products are being
used as labeled. As a result of these requirements, the
Company's products can only be sold in the United States to a
limited number of customers for limited use and cannot be sold
for broader commercial use without future FDA approval. No
assurance can be given that the Company will receive FDA approval
for any of its products or that it will be able to sell its
approved products in larger quantities.
Any change in governmental regulations or in the
interpretation thereof could have a material adverse effect on
the Company. The Company is subject to regulation by other
agencies in addition to the FDA, including the Environmental
Protection Agency, the Occupational Safety and Health
Administration, the Nuclear Regulatory Commission and the
equivalent state and local regulatory agencies. The Company
believes that it is in compliance with the regulations of such
agencies.
Proprietary Rights and Licenses
The Company relies on patent rights, trade secrets,
trademarks, and nondisclosure agreements to establish and protect
its proprietary rights in its technologies and products. Despite
these precautions, it may be possible for unauthorized third
parties to utilize the Company's technology or to obtain and use
information that the Company regards as proprietary. The laws of
some foreign countries do not protect the Company's proprietary
rights in its processes and products to the same extent as do the
laws of the United States.
The Company has filed patent applications seeking patent
protection for certain of its products. Currently, the Company
owns four issued U.S. patents and numerous U.S. patents or patent
applications are issued or pending for inventions owned by or
licensed to the Company. In addition, numerous foreign patent
applications or patents corresponding to these U.S. patents or
patent applications are pending. The Company's owned or licensed
issued U.S. patents have terms which are for the greater of
seventeen years from grant, or twenty years from filing, and
expire between 2007 and 2014.
One of the patents, issued June 6, 1995 and licensed
exclusively to the Company by Princeton University, relates to
methods for the formation of triple stranded nucleic acids. One
of the U.S. patents owned by the Company relates to the Company's
PROBE TECH(TM) technology for Southern analysis of DNA. The second
and third U.S. patents relate to one of the Company's DNA
amplification technologies. Foreign patent applications relating
to this technology are pending in Europe, Canada and Japan. The
fourth U.S. patent is related to the Company's TRI-AMP(TM) DNA
amplification technology. One of the Company's U.S. patent
applications relates to the detection of bladder cancer and two
U.S. patent applications relate to the isolation of fetal cells
from maternal circulation. One pending U.S. patent application
and applications pending in Europe, Japan and Canada relate to
TRI-AMP(TM) enzymatic amplification of nucleic acid sequences
technology. Other patent applications relate to certain aspects
of the Company's genetic probes and reagents, certain aspects of
the technology enabling its in situ hybridization chemistry,
certain aspects of the Company's mutation detection technology,
certain aspects of enhancing fluorescent signals and detecting
amplification products, novel labeled nucleotides developed by
the Company, and novel oligonucleotide analogs and gene repair
methods, both developed by Codon. There can be no assurance that
the United States Patent and Trademark Office (the "PTO") or
foreign patent offices will grant patent protection for the
subject matter of any of these patent applications.
The Company has licensed rights to inventions disclosed in
U.S. and foreign patent applications relating to methods and
probes for detecting the presence of the Fragile X syndrome. The
Company believes that its licensors are the original inventors
and are entitled to patent protection in the United States, but
the Company is aware that certain third parties also have filed
patent applications in the United States and abroad and claim to
be entitled to patents related to this technology. There is
presently pending an interference proceeding with two other
parties in the PTO to resolve which party is entitled to a U.S.
patent, if any. The Company has settled the interference with
respect to one of the parties, and has reached a settlement
agreement in principle with the other party.
The Company relies substantially on certain technologies
which are not patentable or proprietary and are therefore
available to the Company's competitors. In addition, many of the
processes and much of the know-how of importance to the Company's
technology are dependent upon the skills, knowledge and
experience of its scientific and technical personnel, which
skills, knowledge and experience are not patentable. To protect
its rights in these areas, the Company requires all employees,
significant consultants and advisors, and collaborators to enter
into confidentiality agreements. There can be no assurance
however, that these agreements will provide meaningful protection
for the Company's trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure of
such trade secrets, know-how or proprietary information.
Further, in the absence of patent protection, the Company may be
exposed to competitors who independently develop substantially
equivalent technology or otherwise gain access to the Company's
trade secrets, knowledge or other proprietary information.
ONCOR(R), HYBRISOL(R), SURE BLOT(R), COATASOME(R), APOPTAG(R),
FIDELITY(R) and the ONCOR MAN DESIGN(R) are registered trademarks of
the Company. In addition to these trademarks, the Company is
currently using the unregistered trademarks ONCOR ARCHIVE(TM),
OPTICYTE(TM), BLOCKIT(TM), OPTIPROBE(TM), HYB-BATH(TM), EX-WAX(TM),
RNA PREP(TM), TEMPLATE-TAMER(TM), PROBE TECH(TM), N.E.A.T.(TM),
FLUORAMP(TM), INFORM(TM), ONCOR IMAGE(TM), APOTEST(TM) and
TRAPEZE(TM), and has applied for the registration of the latter five
trademarks. The Company has filed applications to register
APOPNEXIN(TM), ONCORPHARM(TM), ROLLING CIRCLE AMPLIFICATION(TM),
RCA(TM) and TRI-AMP(TM) which the Company intends to use as
trademarks. Also, Codon has filed applications for CODON,
ON-CODE, ONCODE, CODE MARKER and CODE REPAIR, which it intends
to use as trademarks. The Company's trademark registrations have
ten year terms and are renewable for additional ten year terms for
as long as the Company is using the registered trademark.
The Company has pursued a strategy of selectively licensing
patents and technologies from third parties to accelerate the
introduction of new products and to provide access to patented
technologies and genetic probes. In some cases, the Company has
assumed the prosecution of patent applications relating to the
technology subject to these licenses. The Company's license
agreements typically have a term equal to the term of the
underlying patent or patents, or, in certain instances, six to
ten years after the first commercial sale of a product developed
from the licensed technology.
Employees
The Company had 179 employees at February 28, 1997,
including 41 research, clinical and related laboratory personnel;
52 employees in sales and marketing; and 86 employees in
administration, finance, regulatory affairs, production and
distribution. Of these employees, 62 reside and work in Europe.
Of the 41 laboratory employees, 20 have Ph.D.'s and one has an
M.D. The future success of the Company will depend in large part
upon its continued ability to attract and retain highly skilled
and qualified personnel. Competition for such personnel is
intense. None of the Company's U.S. employees is represented by
a labor union. The Company has experienced no work stoppages and
believes that its relations with its employees are excellent.
Additional Risk Factors
Risk Associated with the Her-2/neu Gene-Based Test System
In November 1995, an FDA advisory panel (the "Panel") made a
recommendation against final approval of the Company's Pre-Market
Approval ("PMA") application for the use of its Her-2/neu gene-based test
system for diagnostic purposes. In the third quarter
of 1996, the Company received confirmation from the FDA that the
agency had accepted the clinical validity and statistical model
for determining the predictive value of the Her-2/neu test
system. The FDA further indicated that the Company must re-run a
sample of previously examined specimens, undergo a manufacturing
site inspection and develop a physician education and training
program. No assurance can be given that the FDA will overturn
the recommendation of the Panel or that the Company will obtain
FDA approval for its Her-2/neu gene-based test system on a timely
basis, if at all. The failure to obtain FDA approval for its
Her-2/neu gene-based test system on a timely basis, or at all,
would have a material and adverse effect on the Company's
business, financial condition and results of operations. In the
event that the Company receives FDA approval for its Her-2/neu
gene-based test system, there can be no assurance that the
Company will be capable of manufacturing the test system in
commercial quantities at reasonable costs or marketing the
product successfully, that the test system will be accepted by
the medical diagnostic community, or that the market demand for
the test system will be sufficient to allow profitable sales.
History of Operating Losses
Oncor has not been profitable since its inception in
July 1983. For the year ended December 31, 1996, the Company
incurred net losses of approximately $29 million. As of December
31, 1996, the accumulated deficit of the Company was $102
million. The Company expects to incur additional substantial
losses in future periods. The Company is unable to predict when,
or if, it will become profitable.
No Assurance of Regulatory Approvals; Government Regulation
The Company is currently pursuing or expects to pursue FDA
approval of certain existing products and products under
development. There can be no assurance that the Company will
receive regulatory approval for any of its products or, even if
it does receive regulatory approval for a particular product,
that the Company will ever recover its costs in connection with
obtaining such approval. The timing of regulatory approvals is
not within the control of the Company. The failure of the
Company to receive requisite approval, or significant delays in
obtaining such approval, could have a material and adverse effect
on the business, financial condition and results of operations of
the Company.
Approval by the FDA requires lengthy, detailed and costly
laboratory procedures, clinical testing procedures and
application preparation and defense efforts to demonstrate a
product's efficacy and safety before a product can be sold for
diagnostic use. Even if such regulatory approval is obtained for
a product, its manufacturer and its manufacturing facilities are
subject to continual review and periodic inspections by the FDA
and other regulatory agencies. The regulatory standards for
manufacturing are applied stringently by the FDA. Discovery of
previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or
manufacturer, including costly recalls or even withdrawal of the
product from the market. Furthermore, approval may entail
ongoing requirements for postmarketing studies. Failure to
maintain requisite manufacturing standards or discovery of
previously unknown problems could have a material and adverse
effect on the Company's business, financial condition or results
of operations.
Patents and Proprietary Rights
The Company's success will depend in large part on its, or
its licensors', ability to obtain patents, defend its patents,
maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the United States and in
foreign countries. The patent position of firms relying upon
biotechnology is highly uncertain in general and involves complex
legal and factual questions. To date there has emerged no
consistent policy regarding the breadth of claims allowed in
biotechnology patents or the degree of protection afforded under
such patents. The Company relies on certain patents and pending
U.S. and foreign patent applications relating to various aspects
of its products. These patents and patent applications are
either owned by the Company or rights under them are licensed to
the Company. There can be no assurance that patents will issue
as a result of any such pending applications or that, if issued,
such patents will be sufficiently broad to afford protection
against competitors with similar technology. In addition, there
can be no assurance that any patents issued to the Company, or
for which the Company has license rights, will not be challenged,
invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company.
The commercial success of the Company will also depend upon
avoiding the infringement of patents issued to competitors and
upon maintaining the technology licenses upon which certain of
the Company's 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 the
Company's patent and license rights or to determine the scope and
validity of others' proprietary rights. If competitors of the
Company prepare and file patent applications in the United States
that claim technology also claimed by the Company, the Company
may have to participate in interference proceedings declared by
the PTO to determine the priority of invention, which could
result in substantial cost to the Company, even if the outcome is
favorable to the Company. An adverse outcome could subject the
Company to significant liabilities to third parties and require
the Company to license disputed rights from third parties or
cease using the technology. A U.S. patent application is
maintained under conditions of confidentiality while the
application is pending in the PTO, so that the Company cannot
determine the inventions being claimed in pending patent
applications filed by its competitors in the PTO. Further, U.S.
patents do not provide any remedies for infringement that
occurred before the patent is granted.
The University of California and its licensee, Vysis, Inc.
("Vysis"), filed suit against Oncor on September 5, 1995 for
infringement of U.S. Patent No. 5,447,841 entitled Methods and
Compositions for Chromosome Specific Staining which issued on
that same date. The patent relates to a method of performing in
situ hybridization using a blocking nucleic acid that is
complementary to repetitive sequences. The Company has requested
summary judgment of invalidity, non-infringement and
unenforceability of the patent claims in suit. The University
and Vysis have requested a summary judgment of infringement and
validity. In January 1997, a summary judgment hearing was held
but as of March 26, 1997, there had been no decision on the
motions. A failure to successfully defend against or settle this
suit may result in damages being assessed against the Company and
an injunction against the sale of some of the Company's probes
and genetic test kits.
The Company has licensed rights to inventions disclosed in
United States and foreign patent applications relating to methods
and probes for detecting the presence of the Fragile X syndrome.
The Company believes that its licensors are original inventors
and are entitled to patent protection in the United States, but
the Company is aware that two other parties also have filed
patent applications in the United States and abroad and claim to
be entitled to patents related to this technology. The Company
has initiated an interference proceeding with these third parties
in the PTO to resolve which party is entitled to a U.S. patent,
if any. The application licensed by the Company is senior in the
interference. An unfavorable decision in such a proceeding could
have an adverse effect on the Company. The Company has settled
the interference with respect to one of the parties, and has
reached a settlement agreement in principle with the other party.
The Company currently has certain licenses from third
parties and in the future may require additional licenses from
other parties to develop, manufacture and market commercially
viable products effectively. There can be no assurance that such
licenses will be obtainable on commercially reasonable terms, if
at all, that the patents underlying such licenses will be valid
and enforceable or that the proprietary nature of the patented
technology underlying such licenses will remain proprietary.
The Company relies substantially on certain technologies
that are not patentable or proprietary and are therefore
available to the Company's competitors. The Company also relies
on certain proprietary trade secrets and know-how that are not
patentable. Although the Company has taken steps to protect its
unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and
certain of its contractors, there can be no assurance that these
agreements will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently
developed or discovered by competitors.
Uncertainties Relating to Product Development
The Company's actively marketed products have not been
approved by the FDA and may be sold only for research purposes in
the United States and certain other countries. The Company has
undertaken to seek FDA approval for certain of these products,
and may in the future undertake to seek such approval for other
products, and substantial additional investment, laboratory
development, clinical testing and FDA approval will be required
prior to the commercialization of such products for diagnostic
purposes. There can be no assurance that the Company will be
successful in developing such existing or future products, that
such products will prove to be efficacious in clinical trials,
that required regulatory approvals can be obtained for such
products, that such products, if developed and approved, will be
capable of being manufactured in commercial quantities at
reasonable costs, will be marketed successfully or will be
accepted by the medical diagnostic community, or that market
demand for such products will be sufficient to allow profitable
operations.
International Sales and Foreign Exchange Risk
The Company derived approximately $8.7 million or 57% of its
total product revenues, from customers outside of the United
States for the year ended December 31, 1996. The Company
anticipates that a significant amount of its sales will take
place in European countries and likely will be denominated in
currencies other than the U.S. dollar. These sales may be
adversely affected by changing economic conditions in foreign
countries and by fluctuations in currency exchange rates. Any
significant decline in the applicable rates of exchange could
have a material adverse effect on the Company's business,
financial condition and results of operations. Additional risks
inherent in the Company's international business activities
generally include unexpected changes in regulatory requirements,
tariffs and other trade barriers, lack of acceptance of products
in foreign markets, longer accounts receivable payment cycles,
difficulties in managing international operations, potentially
adverse tax consequences, restrictions on repatriation of
earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will
not have a material adverse effect on the Company's future
international revenues and, consequently, on the Company's
business, financial condition and results of operations.
Limited Manufacturing Experience
The Company's ability to conduct clinical trials on a timely
basis, to obtain regulatory approvals and to commercialize its
products will depend in part upon its ability to develop and
maintain facilities to manufacture its products, either directly
or through third parties, at a competitive cost in accordance
with the FDA's prescribed current GMP and other regulatory
requirements. Any failure to maintain manufacturing facilities
in accordance with the FDA's GMP requirements could result in the
inability of the Company to manufacture its products and may
limit the Company's ability to deliver its products to its
customers, which would have a material and adverse effect on the
Company's business, financial condition and results of
operations. No assurance can be given that the Company will be
able to develop and maintain GMP facilities or engage third
parties to do so at a cost acceptable to the Company.
The Company has only limited experience in manufacturing
products on a commercial basis. The Company believes that its
existing manufacturing facilities, along with available
contiguous space currently under option to the Company, will
enable it to produce commercial quantities of its products
through 1997. No assurance can be given, however, that
manufacturing or quality control problems will not arise if the
Company increases production of its products, or if additional
facilities are required in the future.
Limited Marketing and Distribution Experience
The Company markets and sells its products for research
purposes and, once approved by the appropriate regulatory
authority, for diagnostic use, through its direct sales forces in
both Europe and the United States and indirectly through third
parties in the Pacific Rim and other areas. The Company only has
limited experience in sales, marketing and distribution. In
order to market its products directly, the Company must maintain
a sales force with technical expertise and an understanding of
the Company's products. There can be no assurance that the
Company will be able to maintain such a sales force or that the
Company's direct sales and marketing efforts will be successful.
In addition, the Company's products compete with the products of
many other companies that currently have extensive and well-funded
marketing and sales operations. There can be no assurance
that the Company's marketing and sales efforts will compete
successfully against such other companies. To the extent the
Company enters arrangements with third parties, any revenues
received by the Company will be dependent on the efforts of such
third parties, and there can be no assurance that such efforts
will be successful.
Competition and Technological Change
The diagnostic and biotechnology industries are subject to
intense competition and rapid and significant technological
change. Competitors of the Company in the United States and in
foreign countries are numerous and include, among others,
diagnostic, health care, pharmaceutical, biotechnology and
chemical companies, academic institutions, government agencies
and other public and private research organizations. Many of
these competitors have substantially greater financial and
technical resources and production and marketing capabilities
than the Company. There can be no assurance that these
competitors will not succeed in developing technologies and
products that are more effective, easier to use or less expensive
than those that have been or are being developed by the Company
or that would render the Company's technology and products
obsolete and noncompetitive. The Company also competes with
various companies in acquiring technology from academic
institutions, government agencies and research organizations. In
addition, many of the Company's competitors have significantly
greater experience than the Company in conducting clinical trials
of new diagnostic products and in obtaining FDA and other
regulatory approvals of products for use in health care.
Accordingly, the Company's competitors may succeed in obtaining
regulatory approval for products more rapidly than the Company.
See "Business Competition."
Investment in OncorMed, Appligene, and Codon
The Company owns approximately 29% and 80% of the common
stock of its publicly-traded affiliates, OncorMed and Appligene,
respectively, and 42% of the outstanding capital stock securities
of its privately held affiliate, Codon. The shares of common
stock of OncorMed, Appligene, and Codon held by the Company are
not currently freely tradeable and no public market exists for
the common stock of Codon. Therefore, there can be no assurance
that the Company will be able to realize the economic benefit of
its investment or predict the timing of such realization. The
value of the Company's investment in OncorMed and Appligene
represent a significant portion of the total assets of the
Company and such value fluctuates with the market price of those
companies' common stock. Therefore, any event that has a
material and adverse effect on the market price of the common
stock of OncorMed and Appligene will have a material and adverse
effect on the value of the Company's investment in those
companies. Although Stephen Turner, the Company's Chief
Executive Officer, is a Director of OncorMed and, along with the
Company's Chief Financial Officer, Appligene and the Company is a
significant stockholder in those companies, the Company does not
control the day-to-day operations and management of those
companies and, therefore, has a varying but limited direct
control over their operations and financial results. Codon
currently requires significant additional financing to continue
operations. The Company does not currently intend to provide a
significant portion of such financing although the Company may
provide additional financing to continue operations. The failure
of Codon to obtain any required financing on acceptable terms
would have a material and adverse effect on the value of the
Company's investment in Codon.
Restricted Use of the Company's Products
The Company's actively marketed products must be sold in the
United States for research purposes only and must be labeled
accordingly. The FDA imposes distribution requirements and
procedures on companies selling products for research purposes
only, including the requirement that the seller receive specified
certifications from its customer as to the customer's intended
use of the product. As a result of these requirements, the
Company's products can only be sold in the United States to a
limited number of customers for limited use and can not be sold
for broader commercial use without FDA approval. No assurance
can be given that the Company will receive FDA approval for its
products or that it will be able to sell its approved products in
larger quantities. See "Business -- Government Regulation."
Government Funding
The Company's products being sold for research purposes only
are in large part purchased by cancer researchers operating under
government funded programs both in the U.S. and in foreign
countries. These products are also purchased by researchers
involved in the human genome project, which is likewise
principally funded by the government. There can be no assurance
that such government funding will continue at its current level.
The Company would be adversely affected by decreases in or
changes in the direction of government funding for cancer
research or human genome research.
Attraction and Retention of Key Personnel
The Company's ability to successfully develop marketable
products and to maintain a competitive position will depend in
large part on its ability to attract and retain highly qualified
scientific and management personnel. The Company is highly
dependent upon the principal members of its management,
scientific staff, and Medical and Science Advisory Boards.
Competition for such personnel and advisors is intense, and there
can be no assurance that the Company will be able to continue to
attract and retain such personnel. See "Business -- Employees."
Uncertainty Related to Health Care Reform
Measures and Third-Party Reimbursement
Political, economic and regulatory influences are likely to
lead to fundamental change in the health care industry in the
United States. Numerous proposals for comprehensive reform of
the nation's health care system have been introduced in Congress
over the past year. In addition, certain states are considering
various health care reform proposals. The Company anticipates
that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment
methodologies, and that public debate of these issues will likely
continue in the future. Due to uncertainties regarding the
ultimate features of reform initiatives and their enactment and
implementation, the Company cannot predict which, if any, reforms
will be adopted, when they may be adopted, or what impact they
may have on the Company. The Company's ability to earn
sufficient returns on its products may also depend in part on the
extent to which reimbursement for the costs of such products will
be available from government health administration authorities,
private health insurers and other organizations. Third-party
payors are increasingly challenging the price and cost
effectiveness of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that
adequate reimbursement will be available or sufficient to allow
the Company to sell its products on a competitive basis.
Additional Financing Requirements and
Access to Capital Funding
The Company has expended and will continue to expend in the
future substantial funds to continue the research and development
of its products, conduct clinical trials, make capital
expenditures, establish additional manufacturing capability, and
market its products. The Company believes that its existing
funds will be adequate to finance its operations through 1997.
This belief is based on the Company's current research and
development plans, the current regulatory environment, historical
industry experience in the development of biotechnology products
and general economic conditions. However, the Company's cash
requirements may vary materially from those now planned as a
result of unforeseen changes that could consume a significant
portion of the available resources before such time. To the
extent that funds on hand and expected to be generated from the
Company's operations are insufficient to meet current or planned
operating requirements, the Company will seek to obtain
additional funds through equity or debt financing, collaborative
or other arrangements with corporate partners and others, and
from other sources. No assurance can be given that additional
financing will be available when needed or on terms acceptable to
the Company. If adequate funds are not available, the Company
will likely be required to delay or to eliminate expenditures for
certain of its products or to license to third parties the rights
to commercialize products or technologies that the Company would
otherwise seek to develop itself.
Product Liability
The testing, marketing and sale of health care products
could expose the Company to the risk of product liability claims.
A product liability claim could have a material and adverse
effect on the business, results of operations or financial
condition of the Company. The Company currently maintains
product liability insurance coverage of $5.0 million per
occurrence. There can be no assurance, however, that the
insurance policy will respond to any specific claim, that this
coverage will be adequate to protect the Company against future
product liability claims or that product liability insurance will
be available to the Company in the future on acceptable terms, if
at all.
Environmental Risks
The manufacturing and research and development processes of
the Company involve the controlled use of hazardous materials.
The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although
the Company believes that its activities currently comply with
the standards prescribed by such laws and regulations, the risk
of accidental contamination or injury from these materials cannot
be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such
liability could exceed the resources of the Company. In
addition, there can be no assurance that the Company will not be
required to incur significant costs to comply with environmental
laws and regulations in the future.
Possible Volatility of Stock Price
The market prices for securities of life sciences companies,
including the Company, have been highly volatile and the market
has experienced significant price and volume fluctuations that
are unrelated to the operating performance of particular
companies. Announcements of technological innovations or new
commercial products by the Company or its competitors,
developments concerning proprietary rights, including patents and
litigation matters, publicity regarding actual or potential
clinical trial results with respect to products under development
by the Company or others, decisions regarding regulatory
approvals of the products of the Company or others, regulatory
developments in both the United States and foreign countries,
public concern as to the efficacy of new technologies, general
market conditions, as well as quarterly fluctuations in the
Company's revenues and financial results and other factors, may
have a significant impact on the market price of the Common
Stock. In particular, the realization of any of the risks
described in these "Risk Factors" could have a dramatic and
adverse impact on such market price.
ITEM 2. PROPERTIES
The Company's principal administrative, marketing,
manufacturing and research and development facilities consist of
approximately 65,000 square feet in Gaithersburg, Maryland and
12,000 square feet in Strasbourg, France. The Company occupies
the Gaithersburg, Maryland facilities under four lease agreements
expiring in March 2004 with options to extend the principal
leases for up to two additional five year terms. The facilities
in Strasbourg, France are under a capital lease with a term of 15
years, expiring in 2010. The Company believes that suitable
additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
As noted under "Item 1. Business -- Additional Risk
Factors -- Patents and Proprietary Rights," elsewhere in this
Annual Report, the Company has received notices from time to time
claiming that certain of the Company's products infringe patents
of third parties and has submitted the notices to its patent
counsel for review. There can be no assurance, however, that
these claims will not give rise to infringement proceedings
involving the Company or that the Company would prevail in any
such proceedings. Patent litigation has frequently proven in
recent years to be complex and expensive and the outcome of
patent litigation can be difficult to predict. If the Company
were to be precluded from selling products incorporating the
disputed technologies or required to pay damages or make
additional royalty or other payments with respect to such sales,
the Company's business, financial condition and results of
operations could be materially and adversely affected.
The University of California and its licensee, Vysis, filed
suit against Oncor on September 5, 1995 for infringement of U.S.
Patent No. 5,447,841 entitled Methods and Compositions for
Chromosome Specific Staining which issued on that same date. The
patent relates to a method of performing in situ hybridization
using a blocking nucleic acid that is complementary to repetitive
sequences. The Company has requested summary judgment of
invalidity, non-infringement and unenforceability of the patent
claims in suit. The University and Vysis have requested summary
judgment of infringement and validity. In January 1997, a
summary judgment hearing was held. As of March 26, 1997, there
had been no judicial decision on the motions. A failure to
successfully defend against or settle this suit may result in
damages being assessed against the Company and an injunction
against the sale of some of the Company's probes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock
Exchange (the "Exchange") under the symbol "ONC." Prior to
May 15, 1995, the Company's Common Stock was traded on the NASDAQ
National Market. The following table sets forth, for the
calendar periods indicated, the range of high and low sale prices
for the Common Stock as reported by the Exchange or NASDAQ:
High Low
---- ---
1995
First Quarter. . . . . . . . . . . . 5 3-1/2
Second Quarter . . . . . . . . . . . 6-3/4 3-3/4
Third Quarter. . . . . . . . . . . . 8-5/8 5-7/8
Fourth Quarter . . . . . . . . . . . 7-11/16 3-3/4
1996
First Quarter. . . . . . . . . . . . 6-7/8 4-1/8
Second Quarter . . . . . . . . . . . 7 4-7/8
Third Quarter. . . . . . . . . . . . 5-5/8 3-7/8
Fourth Quarter . . . . . . . . . . . 5-3/16 3-5/8
HOLDERS
As of December 31, 1996, the approximate number of record
holders of Common Stock was 488.
DIVIDENDS
The Company has never declared or paid any cash dividends
on its Common Stock. The Company currently intends to retain all
future earnings, if any, for the operation and expansion of its
business and does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as
of December 31, 1992, 1993, 1994, 1995 and 1996, and for each of
the periods then ended, have been derived from the audited
consolidated financial statements of the Company. The
consolidated financial statements of the Company as of
December 31, 1995 and 1996 and for each of the years in the
three-year period ended December 31, 1996, together with the
notes thereto and the related report of Arthur Andersen LLP,
independent public accountants, are included elsewhere in this
Annual Report. The selected financial data set forth below
should be read in conjunction with the consolidated financial
statements of the Company and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report.
Year Ended December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Gross revenues:
Product sales . . . . . . . $6,480 $9,238 $12,425 $16,193 $15,323
Grant revenue . . . . . . . 100 62 342 895 483
Contract revenue. . . . . . - - 48 300 200
-------- --------- --------- --------- ---------
Total gross revenues . 6,580 9,300 12,815 17,388 16,006
-------- ---------- --------- --------- ---------
Operating expenses:
Direct cost of sales. . . . 3,555 4,376 7,254 8,280 9,656
Repositioning expense . . . - - - - 2,075
Amortization of intangible
assets . . . . . . . . . . - - 414 1,339 1,323
Selling, general and
administrative . . . . . . 5,912 7,575 9,539 13,752 15,073
Research and development. . 5,952 9,117 9,609 10,422 9,822
Buyout of R&D contract . . 1,447 - - - -
Write off acquired R&D
projects in process. . . . - - 3,574 - -
-------- --------- --------- ---------- ---------
Total operating expenses . . . . . . 16,866 21,068 30,390 33,793 37,949
-------- --------- --------- ---------- ---------
Loss from operations . . . . . . . . (10,286) (11,768) (17,575) (16,405) (21,943)
Other income (expenses), net . . . . 1,051 681 (2,003) (1,825) (7,037) (2)
-------- -------- --------- ---------- ---------
Net loss . . . . . . . . . . . . . . $(9,235) $(11,087) $(19,578) $(18,230) $(28,980)
======== ========= ========= ========= =========
Net loss per share(1). . . . . . . . $(0.64) $(0.71) $(1.01) $(0.87) $(1.26)
Weighted average shares outstanding 14,518 15,558 19,437 20,888 23,031
December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and liquid investments. . . . . $27,922 $18,587 $23,301 $15,830 $18,880
Total assets . . . . . . . . . . . . 34,822 29,201 51,525 46,121 41,670
Long-term liabilities. . . . . . . . 223 164 2,513 9,320 10,386
Accumulated deficit. . . . . . . . . (23,762) (34,848) (54,427) (72,657) (101,637)
Stockholders' equity . . . . . . . . 33,297 24,186 40,279 25,987 23,344
_________________
(1) Net loss per share is determined using the weighted-average number
of shares of Common Stockoutstanding during the years presented. The
effects of options, warrants, and notes payable to stockholders have
not been considered, since the effects would be antidilutive.
(2) In March 1997, the SEC staff announced position with respect to an
accounting method whereby the full amount of the beneficial conversion
features in convertible debentures is to be charged to interest expense
ratably over the period up to the conversion of the debentures. Pursuant
to this adoption, the Company charged to interest expense $2.6 million
dollars in 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion and analysis provides information
which management believes is relevant to an assessment and
understanding of the Company's results of operations and
financial condition. The discussion should be read in
conjunction with the audited consolidated financial statements of
the Company and notes thereto. This Report contains certain
statements of a forward-looking nature relating to future events
or the future financial performance of the Company. Investors
are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating
such statements, investors should specifically consider the
various factors identified in this Report which could cause
actual results to differ materially from those indicated by such
forward-looking statements, including the matters set forth in
the various captions under the section "Business," most
significantly under the caption "Additional Risk Factors."
Overview
The Company's sales to date have consisted primarily of
sales of products used for research purposes and imaging systems.
Sales of products for diagnostic use require FDA approval. In
July 1996, the Company announced a plan to discontinue or suspend
the development, manufacture and marketing of certain products in
certain geographic regions in which net margins for such products
were low. Such products and regions included the entire
biological imaging product line and the products developed and
manufactured by Appligene as they relate to sale in the United
States. In addition, the Company has suspended the manufacture
and marketing of B/T Blue, a genetic test system for use in the
differentiation, detection, treatment selection and monitoring of
leukemia and lymphoma from whole blood samples, tissues and
marrow specimens, pending the reformulation of the product and
the submission of the required documentation with the FDA. As a
result of all of the aforementioned, analysis of past sales of
products for research use are not necessarily indicative of
future sales of products for research or diagnostic purposes.
In May 1994, the Company acquired the imaging line of
business of Biological Detections Systems, Inc. ("BDS"). The
aggregate purchase price of $3.7 million was paid in cash, notes
and Common Stock of the Company. In September 1994, the Company
acquired 98.5% of the outstanding stock of Appligene,
headquartered in Strasbourg, France. The aggregate purchase
price of $10.6 million was paid in cash, notes and Common Stock
of the Company. The acquisitions of Appligene and the imaging
line of business of BDS in 1994 (together, the "Acquisitions")
were accounted for as purchases and accordingly, the consolidated
results of operations for the Company include the results of
these acquired businesses from their respective dates of
acquisition. The Company attributed approximately $2.5 million
and $1.1 million of the purchase prices of the imaging line of
business of BDS and of Appligene, respectively, to the value of
acquired research and development projects in progress.
Accordingly, such amounts were expensed by the Company at their
respective dates of acquisition. A significant amount of the
Company's sales in Europe are as a result of the Appligene
acquisition. Approximately $1.1 million of the purchase price of
BDS was allocated to intangible assets, and such amount since has
been amortized or written off. Approximately $9.7 million of the
purchase price of Appligene was allocated to intangible assets
and is being amortized on a straight line method over periods of
two to ten years, with a weighted average amortization period of
eight years. See Note 3 of the Notes to Consolidated Financial
Statements.
In October 1994, OncorMed, previously an 83% owned
consolidated subsidiary of the Company, completed an initial
public offering of its common stock which reduced the Company's
ownership interest in OncorMed to approximately 40%.
Accordingly, the results of operations of OncorMed were accounted
for on the equity method of accounting retroactive to January 1,
1994. In addition, the Company increased its carrying value of
its investment in OncorMed by $5.5 million to an amount equal to
the Company's proportionate share of the recorded stockholders'
equity of OncorMed at the completion of the initial public
offering. The adjustment was credited directly to the
stockholders' equity of the Company in the fourth quarter of
1994. In February 1996, OncorMed completed a public offering of
its common stock which reduced the Company's ownership interest
in OncorMed to approximately 29%. The Company increased its
carrying value of its investment in OncorMed by approximately
$4.0 million to an amount equal to the Company's proportionate
share of the recorded stockholders' equity of OncorMed at the
completion of the offering and credit the adjustment directly to
stockholders' equity in the first quarter of 1996. The Company
will continue to record its proportionate share of the results of
operations of OncorMed, expected to be losses throughout 1997,
adjusting the carrying value of the investment and advances until
such time that the carrying value and advances are eliminated.
In June 1994, the Company formed Codon Pharmaceuticals,
Inc., formerly known as OncorPharm, Inc., a consolidated
subsidiary, to develop and commercialize therapeutic products
using Oncor's technologies in the field of genetic repair and
drug delivery. Codon was initially capitalized with a $1.0
million capital contribution from the Company and subsequently
raised $3.0 million in a private placement. The Company has
advanced approximately $0.6 to Codon which amount was converted
into Codon common stock at $2.00 per share. On April 2, 1996,
Codon completed a private placement of 1,012,667 of its preferred
shares of stock at $3.00 per share. The Company purchased
100,000 shares in this second private placement. In October
1996, Codon issued 50,000 shares of its preferred stock to Oncor
in connection with a Series B Stock Dividend. The effect of
these transactions was to reduce the Company's ownership interest
in Codon to approximately 42%. Accordingly, the results of
operations of Codon were accounted for on the equity method of
accounting retroactive to January 1, 1996, resulting in a
non-operating expense of $2.4 million for the Company's
proportionate share of Codon losses in 1996. The Company will
continue to record its proportionate share of the results of
operations of Codon, expected to be losses throughout 1997,
adjusting the carrying value of the investment and advances
until such time that the carrying value and advances are
eliminated. Codon is currently seeking additional funding
to continue operations. Such efforts have not been successful
to date and there can be no assurance that funding to continue
operations will be available. If Codon ceases operations, the
Company will be required to write off its investment in the
affiliate, recorded in "Investment In and Advances to Affiliates"
in an amount of $0.7 million at December 31, 1996.
In the third and fourth quarter of 1996, the Company
completed private placements of securities of $5.0 million and
$8.0 million, respectively, issuing unsecured notes convertible
into shares of Common Stock of the Company and warrants to
purchase shares of the Company's Common Stock. In January 1997,
an additional $2.0 million of convertible notes were issued. As
further discussed under "Results of Operations" and Note 13 to
the Consolidated Financial Statements, these private placements
involve substantial non-cash, current and future charges for
imputed interest.
Results of Operations
Consolidated product sales decreased 5% to $15.3 million in
1996 compared to $16.2 million in 1995, which represented a 30%
increase from $12.4 million in 1994. In 1996, the sales decrease
was attributable largely to the discontinuation of certain
product lines. After adjusting for the elimination of the sales
of discontinued products, sales of continuing products increased
14% from 1995 to 1996. The net increase in sales in 1995 as
compared to 1994 is attributable to increases in product sales in
Europe through the Company's French subsidiary, Appligene,
acquired in September 1994.
Contract and grant revenue decreased 42% to $0.7 million in
1996 compared to $1.2 million in 1995, which increased 200% from
$0.4 million in 1994. Two grants were received from the National
Institutes of Health, one in the middle of 1994 and the other
early in 1995. The contract and grant revenue decreased in 1996
due to the completion of these grants.
Gross profit as a percentage of product sales decreased to
37% in 1996 from 49% in 1995, which represented an increase from
42% in 1994. The decrease in 1996 was due to (i) product mix
changes and competitive pressures on margins in Europe, (ii)
costs for regulating the initial stages of the manufacture of a
controlled diagnostic product and (iii) diseconomies of scale
with respect to manufacturing overhead resulting from reduced
production to lower inventory levels. The increase in 1995 over
1994 was due to favorable product mix and to increased sales in
Europe which had supported higher margins.
Repositioning expense in 1996 is for charges taken related
to the Company's decision to discontinue the development,
manufacture, stocking and marketing of certain selected products
and product lines. Such charges included inventory abandonment
costs, goodwill adjustments and employee separation expenses.
Future such expenses are not anticipated, but may occur.
Amortization of intangible assets in 1996, 1995 and 1994 was
due to the amortization of the portion of the purchase price of
Appligene attributable to the value of intangible assets
acquired, primarily for contracts, completed research projects,
and the excess of the purchase price over the book value of the
assets acquired. The intangible assets are being amortized on a
straight line basis over periods ranging from two to ten years,
with a weighted average period of approximately eight years.
Selling, general and administrative expenses increased 10%
to $15.1 million in 1996, compared to $13.8 million in 1995,
which represented a 44% increase from $9.5 million in 1994. The
increase in 1996 was due to legal and other expenses associated
with certain intellectual property issues more than offsetting
the beneficial effects of cost reduction programs and
deconsolidation of the operating results of Codon in 1996. The
intellectual property issues have not been settled and related
expenses may continue at a significant rate. Codon selling,
general and administrative expenses were $0.7 million for 1995,
its first year of significant administrative expenses. The
increase in 1995 was attributable to expenses related to (i)
Codon, (ii) the first full year of the inclusion of Appligene,
(iii) depreciation on a new facility in France, (iv) ongoing
higher levels of the European sales force, (v) unfavorable
exchange rate differences and (vi) the expansion of the Company's
marketing and field sales force in North America, beginning in
the second half of 1994.
Research and development expenses decreased 11% to $7.3
million in 1996 compared to $8.2 million in 1995, which
represented a 3% increase from $8.0 million in 1994. The
decrease in 1996 resulted primarily from (i) the deconsolidation
of the operating results of Codon and (ii) project cessations as
a result of the product discontinuation plan. Codon research and
development expenses accounted for $1.3 million and $1.1 million
in 1995 and 1994, respectively. The decrease in 1996 was, in
part, offset by the costs associated with (i) initial payments,
made largely in common stock of the Company, at the inception of
two research collaboration agreements with the John Hopkins, (ii)
the initial payment, made in common stock of the Company, at the
inception of a research agreement related to a novel diagnostic
test and (iii) substantial increased activity associated with the
development of other diagnostic products. As the Company
continues to acquire technologies key to the development of major
diagnostic products, such expenses are expected to continue or
increase. There was an increase of $0.6 million in 1995 compared
to 1994 in research and development expenses attributable to the
first full year of the inclusion of Appligene in the consolidated
accounts. This increase was offset, in part, by a decrease in
the expenditures made for license fees and grants to independent
researchers in 1995.
Clinical and regulatory expenses increased 13% to $2.5
million in 1996, compared to $2.3 million in 1995, which
represented a 36% increase from $1.7 million in 1994. The
continued increase of clinical and regulatory expenses in 1996
and 1995 is attributable to the substantial regulatory efforts
associated with the current applications for FDA approval of
certain diagnostic tests including HER-2/neu. As the Company
continues its efforts to concentrate on the development,
manufacture and marketing of controlled diagnostic products,
management expects such expenses to continue or increase.
Write-off of acquired research and development projects in
process of $3.6 million in 1994 was attributable to the
acquisitions of Appligene and BDS.
Investment income decreased 50% to $0.5 million in 1996,
compared to $1.0 million in 1995, which represented a 20%
decrease from $1.3 million in 1994. The level of investment
income is directly related to the level of investment funds which
increased in early 1994 with the public offering of common stock
and again in late 1995 with the private placements, in each case
partially depleted thereafter by subsequent cash operating losses
of the Company.
Interest and other expenses of $3.1 million, $0.5 million
and $0.2 million in 1996, 1995 and 1994, respectively represents
primarily interest expense which has become substantially more
significant through (i) the issuance of convertible debentures in
1996 and 1995 and (ii) the issuance and acquisition of fixed rate
debt related to the businesses acquired in 1994. In 1996,
interest and other expenses included a non-cash charge of $2.6
million representing the value of the beneficial conversion
feature in the conversion formula associated with certain of the
convertible debenture issues made by the Company. Such charges
will continue at a somewhat higher rate through the first two
quarters of 1997. The net increase in interest and other
expenses in 1996 was partially offset by the gain of $0.3 million
on the sale of the Company's pharmaceutical imaging business
unit.
Equity in net loss of affiliates was $4.4 million in 1996 as
compared to $2.4 million and $3.1 million in 1995 and 1994,
respectively. The Company's proportionate share of net losses
attributable to Codon, included in this caption in 1996 but
included in operating results in 1995 and 1994, was $2.4 million.
The remainder of the equity in net loss of affiliates was
attributable to the Company's interest in the losses of its other
unconsolidated affiliate, OncorMed. The decrease in 1995 was due
to a reduction in the level of the Company's interest in OncorMed
in late 1994.
As a result of the factors discussed above, net loss
increased 59% to $29.0 million in 1996 compared to $18.2 million
in 1995, which represented a decrease of 7% from $19.6 million in
1994.
The Company does not believe that inflation has had a
material effect on its results of operations during the last
three years.
Liquidity and Capital Resources
The consolidated cash and liquid investments balances of the
company were $18.9 million at December 31, 1996, compared to
$15.8 million at December 31, 1995. Approximately $8.0 million
of the cash and liquid investments at December 31, 1996 is
limited to fund operations of the Company's European subsidiary.
Liquid investments include restricted cash, cash equivalents and
short-term investments as set forth on the consolidated balance
sheet included elsewhere in this Annual Report. The Company
invests its excess cash exclusively in publicly traded,
investment grade, fixed income securities.
The following table sets forth the most significant elements
of the cash flows of the Company in 1996 (in millions of
dollars):
Net cash used in operating activities $(16.9)
Decrease in net investment in working capital 2.1
Proceeds from the sale of Common Stock and
issuance of convertible notes payable 22.1
Principal portion of debt repayments (2.7)
Purchase of equipment and leasehold
improvements (0.6)
Proceeds from exercise of options and other (1.0)
-------
Net increase in cash and liquid investments $ 3.0
=======
The net cash used in operating activities is the result of
the losses of the Company described in "Results of Operations"
above in this management's discussion and analysis. The
Company's operations in 1997 will require the further utilization
of significant amounts of cash.
The proceeds of $22.1 million from the sales of Common Stock
and issuance of convertible notes payable were from private
placements of $13.0 million in August, September and December
1996 and from sales of Common Stock of Appligene of $9.1 million
in a public offering of its stock in July 1996.
The principal portion of debt service related largely to
debt incurred in connection with acquisitions made in 1994 for
which the final $0.6 million quarterly installment was made in
the third quarter of 1996.
The increase in cash related to reductions in working
capital was caused by the reduction of inventory and accounts
receivable. Reductions in working capital are not expected to
continue at such rates, if at all.
Purchases of equipment are for the on-going replacement of
office and laboratory equipment; the Company expects such
purchases to continue at this rate. Any substantial leasehold
improvements which may be required in manufacturing facilities
are expected to be funded by the Company's primary landlord in
accordance with the Company's current lease agreements.
The Company leases most of its facilities under operating
leases with aggregate annual obligations for 1997 of $0.8
million. The Company has committed to expend $1.0 million in
support of various research agreements in 1997.
The Company includes its proportionate share of the losses
of OncorMed and Codon in its net losses. Losses relating to the
activities of OncorMed and Codon contributed $2.2 million and
$2.4 million, respectively, to the net loss in 1996. Codon
currently requires additional financing other than from the
Company.
Restricted cash of $5.4 million includes $0.7 million which
is contractually restricted for an indefinite period and $4.7
million which became available as unrestricted cash equivalents
early in 1997.
The Company has available approximately $81.1 million in
U.S. income tax net operating loss carryforwards which will
significantly reduce any income tax liability which otherwise
would be due on profits, if any, earned in the future.
The Company has available for use in operations in North
America, where most of its cash losses occur, (i) approximately
$10.2 million dollars at December 31, 1996, or becoming available
shortly thereafter, (ii) an additional $2.0 million raised
through issuance of convertible debentures in January 1997, and
(iii) an irrevocable commitment from a lending source in the
amount of $3.0 million expiring March 31, 1998. The Company also
holds marketable securities in affiliated companies with a
present market value of approximately $22.6 million dollars,
though substantial contractual, regulatory and market
restrictions exist with respect to the rate at which these
investments could be liquidated and significantly fluctuating
market prices make the ultimate future selling prices
unpredictable. With respect to North America, the Company
believes that it has sufficient sources of cash to fund
operations through the remainder of 1997 but believes that it
will need to raise funds or liquidate assets shortly thereafter.
The Company plans to raise needed additional financing through
private equity placements and collaborative or other arrangements
with corporate partners and others. There can be no assurance
that the Company will be able to obtain additional financing when
needed, if at all, or on terms acceptable to the Company. The
Company currently has no commitments to receive additional
financing. Any additional funding which it may raise in 1997 or
1998 likely will be dilutive to the interests of the current
shareholders. Since December 1995, the principal source of funds
for North American operations has been through the issuance of
convertible debt securities. There are terms in certain of the
agreements underlying these transactions which would make it more
difficult to consummate similar such transactions in the future.
There can be no assurance that the Company could access such
funding or other funding sources in the future on commercially
reasonable terms, if at all.
At March 31, 1997 the Company has outstanding approximately
$10.4 million of convertible debentures which convert into Common
Stock of the Company at prices which relate to the quoted trading
prices of the stock in a period immediately preceding the dates
of conversion. If the quoted trading price of the Company's
stock declines to or below approximately $2.75 per share and no
debentures had theretofore been converted, the Company would need
to seek approval from its shareholders to issue the full number
of shares required pursuant to any request to convert all of the
debentures based upon such price. If the shareholders elected
not to provide such approval, the Company would be obligated at
the holders' demands to redeem in cash any remaining unconverted
debentures at a premium to the principal balance of such
debentures. It is unlikely that the Company's cash resources
would be sufficient to both satisfy such redemption demands and
continue to fund operating deficits.
With respect to Europe, the Company believes that its cash
position of approximately $8.0 million is sufficient to fund
operations beyond 1997.
Subsequent Event
In January and February 1997, the holders of certain of the
Company's convertible notes exercised their rights to convert
$2.8 million of principal amount of the notes of the Company.
Accordingly, the Company issued approximately 854,000 registered
shares of Common Stock pursuant to this conversion.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
Index to Consolidated Financial Statements
Pages
Report of Independent Public Accountants . . . . . . . . . . . .F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1995 and 1996 . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations
for the years ended December 31, 1994,
1995 and 1996. . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Changes in
Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996 . . . . . . . . .F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1994,
1995 and 1996. . . . . . . . . . . . . . . . . . . . . .F-5
Notes to Consolidated Financial Statements . . . . . . . . . . .F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oncor, Inc.:
We have audited the accompanying consolidated balance sheets of
Oncor, Inc. (a Maryland corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Company
has incurred significant losses and will require additional
capital prior to March 31, 1998 to continue operating, research
and development and other activities necessary to commercialize
its products. Management's plans in regard to these matters are
described in Note 1.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Oncor, Inc. and subsidiaries as of December 31, 1995 and 1996,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 28, 1997
ONCOR, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, ---------------------------
1995 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $14,249,925 $13,058,657
Short-term investments, at market 1,580,127 388,504
Restricted cash (Note 2) - 5,432,478
Accounts receivable, net of allowance
for doubtful accounts of approxi-
mately $341,000 and $372,000 3,946,147 2,401,639
Receivable from Officer/Director 129,192 294,039
Inventories 6,356,041 3,839,630
Other current assets 1,584,838 863,060
------------ ------------
Total current assets 27,846,270 26,278,007
------------ ------------
NON-CURRENT ASSETS:
Property and equipment, net 7,445,214 5,044,270
Deposits and other non-current assets 718,183 216,035
Investment in and advances to affiliates 832,809 3,213,548
Intangible assets, net 9,278,376 6,918,278
------------ ------------
Total non-current assets 18,274,582 15,392,131
------------ ------------
Total assets $46,120,852 $41,670,138
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,679,034 $2,523,585
Accrued expenses and other current
liabilities 1,596,203 1,656,900
Short-term borrowings 227,839 -
Current portion of long-term debt 2,302,156 719,337
------------ -------------
Total current liabilities 7,805,232 4,899,822
------------ -------------
NON-CURRENT LIABILITIES:
Long-term debt 9,301,408 10,386,110
Deferred rent 18,223 -
------------ -------------
Total non-current liabilities 9,319,631 10,386,110
------------ -------------
Total liabilities 17,124,863 15,285,932
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 3,008,637 3,040,119
------------ -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000
shares authorized, no shares issued - -
Common stock, $.01 par value,
50,000,000 shares authorized,
21,822,477 and 24,214,349 issued;
21,743,068 and 24,134,940 outstanding 217,431 242,143
Common stock warrants outstanding - 781,250
Additional paid-in capital 98,233,612 125,327,438
Deferred compensation - (641,270)
Unrealized gain on investments 556 (94)
Cumulative translation adjustment 412,787 (508,172)
Accumulated deficit (72,656,522) (101,636,696)
Less - 79,409 shares of common
stock held in treasury, at cost (220,512) (220,512)
------------ -------------
Total stockholders' equity 25,987,352 23,344,087
------------ -------------
Total liabilities and
stockholders' equity $46,120,852 $41,670,138
============ =============
The accompanying notes are an integral part
of these consolidated financial statements.
ONCOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------------------
1994 1995 1996
---- ---- ----
GROSS REVENUES:
Product sales $12,424,840 $16,192,836 $15,323,167
Contract and Grants 389,905 1,194,646 682,529
------------------------------------------------
Gross revenues 12,814,745 17,387,482 16,005,696
------------------------------------------------
OPERATING EXPENSES:
Direct cost of sales 7,253,984 8,279,445 9,656,332
Repositioning expense - - 2,075,000
Amortization of
intangible assets 413,771 1,339,023 1,322,838
Selling, general and
administrative 9,539,097 13,751,342 15,073,138
Research and development 7,957,775 8,169,625 7,275,565
Clinical and regulatory 1,651,411 2,252,505 2,545,791
Write off of acquired
research & development
projects in process 3,574,120 - -
------------------------------------------------
Total operating expenses 30,390,158 33,791,940 37,948,664
------------------------------------------------
LOSS FROM OPERATIONS (17,575,413) (16,404,458) (21,942,968)
------------------------------------------------
OTHER INCOME (EXPENSE):
Investment income 1,297,552 1,032,584 519,153
Interest and other
expenses, net (179,946) (501,410) (3,125,344)
Equity in net loss of
affiliates (3,120,928) (2,356,453) (4,431,015)
------------------------------------------------
Net other expense (2,003,322) (1,825,279) (7,037,206)
------------------------------------------------
Net loss ($19,578,735) ($18,229,737) ($28,980,174)
================================================
NET LOSS PER SHARE ($1.01) ($0.87) ($1.26)
================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 19,436,852 20,887,873 23,030,793
================================================
The accompanying notes are an integral part
of these consolidated financial statements.
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1994, 1995, and 1996
(Part I)
Common Unrealized
Common Stock Stock (Loss)
---------------------- Warrants Gain On Deferred
Shares Amount Outstanding Investments Compensation
--------------------------------------------------------------------
BALANCE,
December 31, 1993 15,878,333 $158,783 $5,380 - -
Sales of common
stock 3,350,000 33,500 - - -
Conversion of
common stock
warrants into
common stock 3,479 35 (5,380) - -
Exercise of stock
options 596,495 5,965 - - -
Issuances of
common stock in
connection with
acquisitions 835,631 8,356 - - -
Sales of common
stock of unconso-
lidated affiliate - - - - -
Purchase of
treasury stock - - - - -
Unrealized holding
loss on investments - - - (1,948) -
Cumulative translation
adjustment - - - - -
Net loss - - - - -
--------------------------------------------------------------------
BALANCE,
December 31, 1994 20,663,938 206,639 - (1,948) -
Sales of common
stock 768,384 7,684 - - -
Exercise of unit
purchase options 118,315 1,183 - - -
Exercise of stock
options and
warrants 192,431 1,925 - - -
Net unrealized
holding gain on
investments - - - 2,504 -
Cumulative translation
adjustment - - - - -
Net loss - - - - -
--------------------------------------------------------------------
BALANCE,
December 31, 1995 21,743,068 217,431 - $556 -
Sales of common
stock of subsidiary - - - - -
Issuance of common
stock of unconsoli-
dated affiliates - - - - -
Issuance of common
stock and warrants
in connection with
convertible debt 2,163,242 21,632 781,250 - -
Exercise of stock
options 159,534 1,595 - - -
Issuance of common
stock in connection
with research and
development agreements 148,505 1,485 - - -
Issuance of non-employee
stock options - - - - (641,270)
Cumulative translation
adjustment - - - - -
Net unrealized holding
gain on investments - - - (650)
Net loss - - - - -
--------------------------------------------------------------------
BALANCE,
December 31, 1996 24,214,349 $242,143 $781,250 $(94) $(641,270)
====================================================================
The accompanying notes are an integral part
of these consolidated financial statements.
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1994, 1995, and 1996
(Part II)
Cumulative Additional Treasury Stock
Translation Paid-In Accumulated ------------------
Adjustment Capital Deficit Shares Amount Total
--------------------------------------------------------------------
BALANCE,
December 31,
1993 - $58,942,693 $(34,848,050) 64,409 ($72,387) $24,186,419
Sales of
common
stock - 25,035,161 - - - 25,068,661
Conversion
of common stock
stock warrants
into common
stock - 21,405 - - - 16,060
Exercise of stock
stock
options - 1,066,807 - - - 1,072,772
Issuances of
common stock
in connection
with
acquisi-
tions - 4,193,799 - - - 4,202,155
Sales of
common
stock of
unconsol-
lidated
subsidiary - 5,474,926 - - - 5,474,926
Purchase of
treasury
stock - - - 15,000 (148,125) (148,125)
Unrealized holding
loss on
investments - - - - - (1,948)
Cumulative
translation
adjustment (13,224) - - - - (13,224)
Net loss - - (19,578,735) - - (19,578,735)
BALANCE,
December 31,
1994 (13,224) 94,734,791 (54,426,785) 79,409 (220,512) 40,278,961
Sales of common
stock - 2,801,800 - - - 2,809,484
Exercise of
unit
purchase
options - 172,433 - - - 173,616
Exercise of stock
options and
warrants - 524,588 - - - 526,513
Net unrealized
holding gain
on
invest-
ments - - - - - 2,504
Cumulative
translation
adjustment 426,011 - - - - 426,011
Net loss - - (18,229,737) - - (18,229,737)
------------------------------------------------------------------
BALANCE,
December 31,
1995 412,787 98,233,612 (72,656,522) 79,409 (220,512) 25,987,352
Sales of common
stock of
subsidiary - 5,347,641 - - - 5,347,641
Issuance of common
stock of
unconsolidated
affiliates - 7,080,504 - - - 7,080,504
Issuance of common
stock and warrants
in connection
with convertible
deb - 12,802,185 - - - 13,605,067
Exercise of stock
options - 666,940 - - - 668,535
Issuance of common
stock in connection
with research
and development
agreements - 460,619 - - - 462,104
Issuance of
non-employee
stock
options - 735,937 - - - 94,667
Cumulative
translation
adjust-
ment (920,959) - - - - (920,959)
Net unrealized
holding
gain on
investments - - - - (650)
Net loss - - (28,980,174) - - (28,980,174)
--------------------------------------------------------------------
BALANCE,
December 31,
1996 ($508,172) $125,327,438 ($101,636,696) 79,409 ($220,512) $23,344,087
====================================================================
The accompanying notes are an integral part
of these consolidated financial statements.
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($19,578,735) ($18,229,737) ($28,980,174)
Adjustments to reconcile net loss to
net cash used in operating activities:
Write off of acquired research &
development 3,574,120 - -
Issuance of common stock for interest
and imputed interest of convertible
notes - - 2,755,235
Issuance of common stock in
connection with research and
development agreements - - 462,104
Depreciation and amortization 1,770,707 3,028,523 2,858,337
Gain on disposal of assets - - (269,978)
Non-cash product discontinuation - - 1,719,473
Equity in net loss of affiliate
and other 3,120,928 2,409,027 4,431,004
Expenses for non-employee
stock options - - 94,667
Changes in operating assets
and liabilities:
Accounts receivable (438,189) (172,618) 1,434,837
Inventories (534,842) (847,473) 1,468,239
Other current assets 316,843 (593,076) 269,912
Deposits and other non-current
assets (15,892) 25,176 1,776
Accounts payable 1,601,672 705,260 (937,002)
Accrued expenses and other
current liabilities (122,896) (59,360) (134,451)
Deferred rent (72,858) (72,858) (18,223)
Net cash used in operating -------------------------------------------
activities (10,379,142) (13,807,136) (14,844,244)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,285,315) (3,127,285) (630,594)
Disposals of property and equipment - - 393,194
Acquisitions of businesses (Note 3) (3,974,649) (194,420) -
Issuance of note receivable (715,751) - -
Currency protection in Appligene
agreement - - (44,423)
Purchase of stock in affiliate - - (300,000)
Unrealized loss on investments (1,948) 2,504 (9,890)
Purchases of investments (13,551,122) - -
Redemptions of investments 100,000 11,970,995 681,623
Net cash (used in) provided -------------------------------------------
by investing activities (19,428,785) 8,651,794 89,910
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 25,068,661 2,809,484 -
Proceeds from sales of common stock
of subsidiary 225,000 3,034,503 9,099,364
Offering costs of private placement - - (54,100)
Purchase of treasury stock (148,125) - -
Exercise of stock options and warrats 1,088,832 700,129 668,535
Deferred offering costs 342,440 - -
Change in restricted funds - - (5,432,478)
Payment on notes for acquisitions (1,149,842) (2,990,507) (1,764,636)
Payment on bank loans (473,498) (1,169,381) (884,919)
Proceeds from borrowings and issuance
of warrants - 7,366,482 13,207,410
Net cash provided by financing -------------------------------------------
activities 24,953,468 9,750,710 14,839,176
-------------------------------------------
EFFECT OF CHANGE IN EXCHANGE RATE -------------------------------------------
ON CASH (13,224) (95,354) (485,080)
-------------------------------------------
Net (decrease) increase in cash and
cash equivalents (4,867,683) 4,500,014 (400,238)
CASH AND CASH EQUIVALENTS, beginning of
the period 14,617,594 9,749,911 13,458,895
-------------------------------------------
CASH AND CASH EQUIVALENTS, end of the
period $9,749,911 $14,249,925 $13,058,657
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
interest $165,626 $389,842 $251,892
The accompanying notes are an integral part
of these consolidated financial statements.
ONCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
(1) ORGANIZATION, PRINCIPLES OF CONSOLIDATION AND CERTAIN
ELEMENTS OF RISK
Nature of Organization
Oncor, Inc. (together with its consolidated subsidiaries,
hereinafter the "Company" or "Oncor") develops and markets
gene-based test systems and related products for use in the
management of cancer, including risk assessment, detection,
treatment selection and monitoring. Oncor is developing
additional gene-based test systems for the management of
certain cancers including breast cancer, cervical cancer,
bladder cancer, lung cancer and ovarian cancer. In addition
to its gene-based test systems, the Company currently
manufactures and markets over 200 genetic probes to specific
human genes, with related reagents and instrumentation,
for research purposes. The Company also produces and
markets molecular biology products. The Company
currently sells its products to over 1,700 customers world-wide.
Principles of Consolidation
The consolidated financial statements include the accounts
of Oncor, Inc. and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The Company records investments in affiliates
owned more than 20%, but not in excess of 50%, using the equity
method.
Significant Risks and Uncertainties
Through December 31, 1996, the Company has incurred
cumulative losses totaling approximately $102 million.
Operations of the Company are subject to certain risks and
uncertainties including, among others, uncertainties relating to
product development, significant operating losses, competition,
technological uncertainty, reliance on patents and proprietary
rights, dependence on key personnel, governmental regulations and
legislation and the availability of additional capital.
Consequently, there can be no assurance as to the level of future
operations or as to their profitability.
The Company has available for use in operations in North
America, where most of its cash losses occur, (i) approximately
$10.2 million dollars at December 31, 1996, or becoming available
shortly thereafter, (ii) an additional $2.0 million raised
through issuance of convertible debentures in January 1997, and
(iii) an irrevocable commitment from a lending source in the
amount of $3.0 million expiring March 31, 1998. The Company also
holds marketable securities in affiliated companies with a
present market value of approximately $22.6 million dollars,
though substantial contractual, regulatory and market
restrictions exist with respect to the rate at which these
investments could be liquidated and significantly fluctuating
market prices make the ultimate future selling prices
unpredictable. With respect to North America, the Company
believes that it has sufficient sources of cash to fund
operations through the remainder of 1997 but believes that it
will need to raise funds or liquidate assets shortly thereafter.
The Company plans to raise needed additional financing through
private equity placements and collaborative or other arrangements
with corporate partners and others. There can be no assurance
that the Company will be able to obtain additional financing when
needed, if at all, or on terms acceptable to the Company. The
Company currently has no commitments to receive additional
financing. Any additional funding which it may raise in 1997 or
1998 likely will be dilutive to the interests of the current
shareholders. Since December 1995, the principal source of funds
for North American operations has been through the issuance of
convertible debt securities. There are terms in certain of the
agreements underlying these transactions which would make it more
difficult to consummate similar such transactions in the future.
There can be no assurance that the Company could access such
funding or other funding sources in the future on commercially
reasonable terms, if at all.
At March 31, 1997 the Company has outstanding approximately
$10.4 million of convertible debentures which convert into Common
Stock of the Company at prices which relate to the quoted trading
prices of the stock in a period immediately preceding the dates
of conversion. If the quoted trading price of the Company's
stock declines to or below approximately $2.75 per share and no
debentures had theretofore been converted, the Company would need
to seek approval from its shareholders to issue the full number
of shares required pursuant to any request to convert all of the
debentures based upon such price. If the shareholders elected
not to provide such approval, the Company would be obligated at
the holders' demands to redeem in cash any remaining unconverted
debentures at a premium to the principal balance of such
debentures. It is unlikely that the Company's cash resources
would be sufficient to both satisfy such redemption demands and
continue to fund operating deficits at its current rate.
Concentrations of Credit Risk
The Company and its customers are directly affected by the
well being of the health care industry world-wide (see Note 9).
Concentrations of credit risk with respect to receivables is
generally limited due to the large number of customers in the
Company's customer base. The Company maintains an allowance for
doubtful accounts based upon its expectation of the proportion of
its receivables it shall be able to collect. With respect to its
investments, it is the policy of the Company to invest only in
publicly traded, investment grade, fixed income securities with
minimal exposure to foreign currency risk. The Company does not
invest in derivative securities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management's Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Reserves have been recorded for estimates of
uncollectible accounts receivable and excess and obsolete
inventory. Management also uses estimates to determine the
estimated lives of its intangible and tangible assets. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable, accrued
liabilities and short-term borrowings, as reflected in the
financial statements, approximate fair value because of the
short-term maturity of those instruments. The fair value of
notes receivable does not materially differ from the carrying
value. The fair value of the Company's long-term debt does not
materially differ from fair value as the majority of the
debentures were issued at year-end.
Impairment of Long-Lived Assets
The Company complies with Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of.
The Company reviews its long-lived assets, including identifiable
intangibles; goodwill; and property, plant and equipment, for
impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived
assets, the Company evaluates the probability that future
undiscounted net cash flows will be less than the carrying amount
of the assets. Impairment is measured at fair value.
Cash Equivalents and Investments
Cash equivalents and investments at December 31, 1995 and
1996, consist primarily of funds invested in money market
instruments, commercial paper and U.S. government treasury bills.
Investments with maturities between three months and one year are
classified as short-term investments. Investments in securities
with original maturities of less than three months are considered
cash equivalents. Restricted cash of $0.7 million held in a
single money market fund was pledged until January 1997 as
security to a bank which guaranteed the principal and interest of
a note issued in an acquisition. Cash of $4.0 million was
restricted until a registration statement filed with the
Securities and Exchange Commission was declared effective, which
declaration occurred on February 28, 1997. The remaining $0.7
million in restricted cash is pledged as collateral for a loan of
an officer and director for an indefinite period of time.
The Company accounts for investments in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity
Securities. All investments are classified as available-for-sale
securities and, accordingly, carried at fair market value.
Unrealized holding gains and losses are excluded from earnings
and reported as a net amount in a separate component of
shareholders' equity until realized. In computing gains and
losses, costs are determined on the basis of specific
identification. The gross realized gains and (losses) on
available-for-sale securities totaled $52,511 and ($107,993),
respectively, for the year ended December 31, 1996.
Revenue Recognition
The Company generally recognizes revenue from product sales
when the related goods are shipped. Grant and contract revenues
are recognized on a percentage-of-completion basis.
Foreign Currency Translation
In September 1994, the Company acquired an operation in
France (see Notes 3 and 8) for which the functional currency is
the French franc ("FF"). Assets and liabilities for the
operation have been translated into U.S. dollars using the
exchange rate in effect on December 31, 1995 and 1996. Revenues
and expenses have been translated using the average exchange rate
during the periods presented. Cumulative translation gains and
(losses) of $412,787 and ($508,172) at December 31, 1995 and
1996, respectively, have been excluded in determining the results
of operations and have been accumulated as a separate component
of equity.
Income Taxes
The Company files a consolidated U.S. federal income tax
return for the parent and all U.S. subsidiaries in which its
ownership exceeds 80%. The Company filed a consolidated income
tax return in France for its French subsidiaries in 1995.
Effective in 1993, the Company adopted SFAS No. 109,
Accounting for Income Taxes, retroactive to January 1, 1993.
With respect to U.S. federal income tax, as of December 31,
1996 the Company has net operating loss carry-forwards ("NOLs")
of approximately $81.1 million available to offset future taxable
income. The Company also has research and development tax
credits of approximately $1.4 million available to reduce future
U.S. federal income tax. The tax NOL and research and
development tax credits may be used through 2010, but begin to
expire in 1998. Despite the NOL and credit carry-forwards, the
Company may have an income tax liability in future years due to
the application of the alternative minimum tax rules. In
addition, the utilization of these tax NOL and credit
carry-forwards is subject to statutory limitations
regarding changes in ownership. With respect to its tax position
in France, the tax provision and liability are not significant.
The French company had accumulated capital loss and tax loss
carryforwards of approximately $9.6 million and $15.2 million
French francs, respectively, at December 31, 1996.
SFAS No. 109 requires that the tax benefit of financial
reporting NOLs and tax credits be recorded as an asset to the
extent that management assesses the utilization of such NOLs and
tax credits to be "more likely than not." As of December 31,
1996, the Company's net deferred tax assets in the United States
and France were approximately $34.2 million and $1.6 million,
respectively. A valuation reserve was recorded against the
entire amount of both net deferred tax assets, since the Company
has incurred operating losses in the United States since
inception and in France on a frequent basis. The net deferred
tax assets are primarily attributable to net operating losses,
capital losses and tax credits.
Research and Development Costs
Expenditures for research and development activities are
charged to expense as incurred.
Net Loss Per Share
Net loss per share is determined using the weighted-average
number of shares of Common Stock outstanding during the years
presented. The effects of options, warrants, and convertible
notes payable to stockholders have not been considered, since the
effects would be antidilutive.
(3) MERGER AND ACQUISITIONS
Acquisition of Imaging Systems Line of Business
In May 1994, Oncor acquired certain assets of Biological
Detection Systems, Inc. and a subsidiary. The assets acquired
constitute substantially all of the assets, properties and rights
relating to or used in the Apple Computer-based research
instrument imaging systems and software business (collectively,
the "Imaging Business") of the Sellers. The consideration paid
for the Imaging Business was (i) cash payments of approximately
$1.4 million, (ii) a promissory note in a principal amount of
$1.2 million, (iii) 200,000 unregistered and previously unissued
shares of the Company's Common Stock valued at $5.12 per share,
and (iv) the assumption of certain less significant liabilities
and obligations. The transaction was accounted for as a purchase
and the purchase price has been allocated as shown in the table
below:
Inventories $ 36,594
Other current assets 36,817
Property and equipment 115,820
Intangible assets
(completed software) 1,061,980
Research & development
projects in process 2,464,120
-----------
TOTAL $ 3,715,331
===========
The costs allocated to intangible assets acquired in the
acquisition have been written off as of December 31, 1996.
Amounts allocated to research and development projects in process
were charged to expense in the second quarter of 1994. The
Company discontinued the development and sale of its imaging
system product line in 1996.
Acquisition of Appligene S.A.
In September 1994, Oncor acquired 98.5% of the outstanding
capital stock of Appligene S.A., a French societe anonyme,
("Appligene"). Appligene is a developer, manufacturer and
marketer of molecular genetic products and is based in
Strasbourg, France. The consideration paid was (i) cash payments
in French francs of FF 12,810,000 (approximately $2.3 million)
(ii) convertible promissory notes with an aggregate principal
amount of FF 23,655,000 (approximately $4.4 million) and (iii)
635,631 unregistered and previously unissued shares of the
Company's Common Stock, $0.01 par value, valued at approximately
$3.2 million. The transaction was accounted for as a purchase
and the allocation of the purchase price is set forth in the
table below:
Cash $ 261,317
Accounts receivable 1,197,989
Inventories 1,156,564
Other current assets 469,898
Property and equipment 371,255
Other assets 69,192
Intangible assets 9,747,515
Research & development
projects in process 1,110,000
Accounts payable and accrued
expenses (1,387,083)
Notes payable (1,631,151)
Long-term debt (731,357)
------------
TOTAL $10,634,139
============
The costs allocated to intangible assets acquired in the
acquisition are being amortized on a straight line method over
periods of 5 to 10 years, with a weighted average amortization
period of 8 years. Intangible assets include the estimated
values of employment contracts, patents and licenses, and
goodwill. The costs allocated to research and development
projects in process were charged to expense in the third quarter
of 1994.
Pro Forma Results of Acquired Entities
The results of operations of Appligene and the Imaging
Business have been included in the Company's consolidated results
of operations from the respective dates of acquisition.
Unaudited pro forma results of operations for the Company,
assuming both of the acquisitions described above occurred on
January 1, 1994 are as follows:
(Unaudited)
Year End December 31,
--------------------------
1994
----
Revenues $16,137,612
Net loss (20,073,747)
Net loss per share ($1.01)
Such pro forma information is not intended to represent
either the actual results which may have been achieved if the
acquisitions occurred on that date or future results which may be
achieved.
(4) REPOSITIONING EXPENSE
In 1966, the Company adopted a repositioning plan to
discontinue the development, manufacture, sale and support of
certain imaging, research, and non-diagnostic genetics products.
Recorded repositioning costs of $2,075,000 comprise the charge-off of
discontinued products, charge-off of goodwill associated
with such products, and severance payments to employees
terminated in conjunction with the plan.
(5) TRANSACTIONS INVOLVING AFFILIATED COMPANIES
OncorMed, Inc.
In 1994, the Company and OncorMed entered into a license
agreement pursuant to which OncorMed has a worldwide license to
those of Oncor's existing and future human genome technologies
which are useful for the purposes of development and
commercialization of OncorMed's services. This agreement is
subject to rights retained by the Company to use the licensed
technologies for development and commercialization of Oncor's
products, which may then be sold to OncorMed and to third
parties. Under this agreement, OncorMed is obligated to pay
royalties semi-annually equal to the greater of 6% of OncorMed's
related revenues or $100,000. In February 1997, the terms of the
license agreement were amended on a prospective basis to, among
other things, broaden the basis of the payments to be made to
Oncor, reduce the payment rates and adjust the minimum payment
schedule.
From the period of inception of OncorMed until June 6, 1994,
the Company advanced funds to OncorMed, the balance of which was
converted to a term note due in June 1999 in the principal amount
of $715,751 which bears interest at the rate of 7% per year. The
note is recorded as a note receivable from unconsolidated
affiliate and included in investments and advances to affiliates
in the consolidated balance sheet at December 31, 1995 and 1996.
Included in other current assets at December 31, 1995 and 1996,
are balances of $137,909 and $109,854, respectively, due from
OncorMed, a majority of which represents royalties receivable
under the license agreement.
In October 1994, OncorMed completed an initial public
offering of 1,335,000 shares of its common stock at $6.00 per
share. In November 1994, the Underwriter exercised the
over-allotment option to purchase an additional 200,250 shares at
$6.00 per share. The effect of this transaction was to reduce
the Company's ownership interest in OncorMed from 83% to
approximately 40%. As the Company's voting interest was
thereafter less than 50%, the Company accounts for its investment
in OncorMed using the equity method of accounting. The financial
statements for the year ended December 31, 1994 have been
retroactively adjusted to record the results of OncorMed pursuant
to the equity method of accounting. Thereafter, the Company only
reflects in its financial statements its proportionate share of
the earnings or losses of OncorMed. The restatement had no
impact on the Company's net loss or net loss per share. OncorMed
realized net cash proceeds of approximately $6.3 million from the
sale of its shares, after underwriting discounts and commissions
and expenses of the public offering. The initial public offering
resulted in an increase of approximately $5.5 million in the
Company's proportionate share of OncorMed equity, which has been
recorded as an increase in the Company's investment in OncorMed
and in its additional paid-in-capital. In February 1996,
OncorMed completed a public offering of 2,000,000 shares of its
common stock at $7.75 per share. The effect of this transaction
was to reduce the Company's ownership interest in OncorMed to
approximately 29%. The public offering resulted in an increase
of approximately $4.0 million in the Company's proportionate
share of OncorMed's equity which has been recorded as an increase
to the Company's investment in OncorMed and in its paid-in-capital.
Summarized financial information of OncorMed is as follows:
1994 1995 1996
---- ---- ----
Condensed Statement of
Income
Net Sales $ 34,303 $ 311,387 $ 627,390
Operating Loss (4,098,171) (6,686,134) (7,915,717)
Net Loss $(3,981,373) $(6,510,547) $(7,455,973)
Condensed Balance Sheet
Current Assets $ 7,459,421 $ 931,122 $ 7,934,124
Non-current Assets 912,762 1,520,752 1,179,851
Current liabilities 801,708 1,331,806 1,444,762
Non-current liabilities 730,449 726,261 719,334
Shareholders' equity $ 6,840,026 $ 393,807 $ 6,949,879
At December 31, 1995 and 1996, the quoted market value of
the Company's investment in OncorMed, based on a closing
quotation of $6.00 and $4.8125 per share, was approximately $12
million and $9.6 million, respectively; however, OncorMed is in
the development stage, its stock price is highly volatile, and
its trading volume is very low. OncorMed has issued warrants to
the Underwriter to purchase 133,500 shares, exercisable for a
period of three years commencing two years from the date of the
offering at $6.90 per share. OncorMed also has adopted a stock
option plan covering 2,250,000 common shares and has outstanding
approximately 1,540,000 options at December 31, 1996. If all
such outstanding warrants and options were exercised, the
Company's ownership interest in OncorMed would be reduced to
approximately 23%.
Codon Pharmaceuticals, Inc.
In June 1994, the Company formed and incorporated Codon
Pharmaceuticals, Inc. ("Codon"), formerly known as OncorPharm,
Inc., to develop and commercialize the therapeutic application of
Oncor's technologies in the field of genetic repair. Oncor
contributed $1.0 million in exchange for 2,000,000 shares of
Codon common stock. During the remainder of 1994, Oncor advanced
funds aggregating approximately $0.6 million to Codon to augment
its working capital. Codon performed research services for Oncor
for which Codon received revenues and reduced its obligations
pursuant to the advances. In December 1994, the balance of the
advances was converted into a note which is convertible into the
common stock of Codon at a rate of $2.00 principal amount for
each share of common stock. This note was converted into 316,251
shares of common stock in 1995.
In December 1994, Codon issued an aggregate of 450,000
shares of common stock to certain members of its board of
directors at $.50 per share. In February through May 1995, Codon
issued an aggregate of 140,000 shares of common stock at $.50 per
share and in April 1995, completed a private placement of
1,500,000 shares of convertible preferred stock at $2.00 per
share. On April 2, 1996, Codon completed a private placement of
1,012,667 of its preferred shares of stock at $3.00 per share.
The Company purchased 100,000 shares in this second private
placement. In October 1996, Codon issued 50,000 additional
preferred shares in connection with a Series B Stock Dividend.
The effect of this transaction was to reduce the Company's
ownership interest in Codon to approximately 42%. As the
Company's voting interest is now less than 50%, the Company has
accounted for its investment in Codon using the equity method of
accounting. The financial statements of the Company for the
three months ended March 31, 1996 have been retroactively
adjusted to record the results of Codon pursuant to the equity
method of accounting from January 1, 1996. Accordingly, the
Company has reflected in the consolidated financial statements
presented for all periods in 1996 only its proportionate share of
the earnings or losses of Codon. The restatement had no impact
on the Company's consolidated net loss or net loss per share.
Included in other current assets at December 31, 1996 is a
balance of approximately $0.1 million due from Codon.
Codon also has adopted a stock option plan covering
1,400,000 common shares and has granted approximately 1,362,500
options through December 31, 1996. If all such outstanding
options were exercised, the Company's ownership interest in Codon
would be reduced to approximately 34%.
Codon is presently seeking additional funding from other
sources to continue its research efforts. Thus far, such efforts
have not been successful and there can be no assurance that such
funding will be available or that Codon will be successful in
developing or commercializing any therapies or products. If
Codon ceases operations, the Company will be required to write
off its investment in the affiliate, included in Investments in
and Advances to Affiliates in an amount of $0.7 million at
December 31, 1996.
Summarized financial information of Codon for the period
following deconsolidation is as follows:
1996
----
Condensed Statement of Income
Net Sales $ -0-
Operating Loss (4,033,733)
Net Loss $(4,222,904)
Condensed Balance Sheet
Current Assets $ 448,255
Non-current Assets 1,434,677
Current liabilities 392,604
Non-current liabilities 123,037
Shareholders' equity $ 1,367,291
Appligene, Inc.
In July 1996, Appligene Oncor S.A. ("Appligene"), the
European subsidiary of the Company, completed an initial public
offering of newly issued common shares for approximately $9.1
million. As a result of this transaction, the Company's equity
interest in Appligene was reduced to approximately 80%.
In connection with this offering, Appligene entered into an
agreement with the underwriter and market maker to share in the
gains and losses in after-market stabilization activities. The
parties are currently negotiating amendments to the agreement
with the objective of significantly reducing Appligene's
potential exposure. However, there can be no assurance that such
an amendment will be successfully negotiated or, if so, that such
amendment would reduce Appligene's potential exposure in any
material respect. The Company has recorded as a cost of the
offering $0.5 million for a portion of the trading losses
incurred by the underwriter to date.
(6) RESEARCH, DEVELOPMENT AND LICENSING AGREEMENTS
Agreements with Dr. Albert de la Chapelle
In January 1994, the Company and Dr. Albert de la Chapelle,
a senior research scientist, entered into two agreements: a
License Agreement and a Sponsored Research Agreement. Pursuant
to the License Agreement, the Company has paid Dr. de la Chapelle
an initial License fee of $125,000 and is obligated to pay a
royalty of 6% of net sales on products that are covered by a
claim of one of the licensed patents, subject to a minimum
quarterly royalty payment of $6,250 which is effective from the
date of the License Agreement. Pursuant to the Research
Agreement, which expired at the end of 1996, the Company funded
Dr. de la Chapelle's further research by paying a designee of Dr.
de la Chapelle $150,000 per year.
Johns Hopkins Collaborative Research Agreement
In October 1992, the Company entered into a joint
Collaborative Research Agreement for the discovery and
commercialization of new genetic technologies for the detection
of cancer with The Johns Hopkins University School of Medicine
("Johns Hopkins"). The agreement called for the Company to pay
$1.2 million over the three-year agreement period, which was
charged to research and development expense over the agreement
period. As additional consideration, the Company issued 60,000
shares of its Common Stock, which was valued at $0.3 million and
recorded as research and development expense during 1992. In
December 1995, this agreement was extended for an additional
three years, pursuant to which the Company is to pay $1.5 million
over this period.
(7) STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of
Preferred Stock (par value of $.01 per share). No shares of
Preferred Stock have ever been issued. The rights of any
Preferred Stock ultimately issued will be determined by the Board
of Directors upon issuance.
Common Stock and Warrants
On December 30, 1996, the Company completed a private
placement of 6% five-year unsecured notes convertible into shares
of Common Stock of the Company and warrants to purchase an
aggregate of 200,000 shares of the Company's Common Stock. The
Company received total proceeds of approximately $8.0 million of
which $375,000 was allocated to the warrants, $2.0 million to
paid-in-capital, and the remainder to the notes. Issuance costs
were not significant. In January 1997, the amount of the
debentures issued was increased to $10.0 million. The notes are
immediately convertible at the option of the holder and will be
automatically converted upon maturity. The notes are convertible
at the lesser of $5.00 per share or prices which reduce from
100.0% to 80.0% of the market value of the Common Stock at the
time of conversion over a period of approximately five months.
On September 30, 1996, the Company completed a private
placement of 6% three-year unsecured notes convertible into
shares of Common Stock of the Company and warrants to purchase an
aggregate of 250,000 shares of the Company's Common Stock. The
Company received total proceeds of $5.0 million of which $406,250
was allocated to the warrants, $1.2 million to paid-in-capital,
and the remainder to the notes. Issuance costs were not
significant. The notes are immediately convertible at the option
of the holder and will be automatically converted upon maturity.
The notes are convertible at prices which reduce from 100.0% to
80.0% of the market value of the Common Stock at the time of
conversion over a period of approximately five months.
In December 1995, the Company completed a private placement
of 768,384 shares of its Common Stock and issued convertible 4.5%
unsecured notes payable of $7,000,000. Total proceeds, net of
issuance costs were approximately $9,300,000. As of
December 31, 1996, all these notes had been converted.
In February 1994, the Company completed a public offering of
3,350,000 shares of its Common Stock at a price of $8.125 per
share. Total proceeds, net of issuance costs, were approximately
$25.1 million.
The Company records as interest expense the difference
between the conversion price and the quoted price of the stock
issuable upon conversion of convertible debentures. This imputed
interest is accreted on a straight line basis, over the holding
periods of the debentures. The interest expense recorded in 1996
is approximately $2.6 million.
In January, February and September of 1996, and in February
of 1997, the Company filed registration statements on Form S-3
with the Securities and Exchange Commission covering the sale of
up to approximately 4,194,930, 260,580, 4,631,495 and 4,907,645
shares, respectively, of Common Stock held by third party
shareholders or issuable under certain contractual conditions,
including shares issuable on exercise of certain options and the
conversion of certain notes payable. Generally, the registration
statements will remain effective for up to three to five years.
Stock Options
The Company maintains a Stock Option Plan which was approved
by the Board of Directors in March 1992 (the "1992 Stock Option
Plan"), which incorporated the Company's former Incentive Stock
Option Plan, Non-Qualified Stock Option Plan and Non-Qualified
Stock Option Plan for Non-Employee Directors.
The aggregate number of shares available for issuance under
the 1992 Stock Option Plan may not exceed 5,015,604 shares of
Common Stock, subject to adjustment from time to time in the
event of certain changes to the Company's capital structure.
The Company accounts for this plan under APB Opinion No. 25,
under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with
FASB Statement No. 123, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts:
1995 1996
Net Loss: As Reported ($18,229,737) ($28,980,174)
Pro Forma (18,664,502) (30,544,795)
Net Loss Per Share: As Reported ($0.87) ($1.26)
Pro Forma ($0.89) ($1.33)
Because the Statement 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the
resulting pro forma compensation cost may not be representative
of that to be expected in future years.
The fair market value of each option grant is estimated
using the Black-Scholes option pricing model with the following
assumptions used for grants in 1995 and 1996: risk-free interest
rates of 4 percent; expected lives of 5.9 years for the options;
and expected volatility of 55.8 percent.
Transactions relating to the Company's stock option plans
are as follows:
1992 Stock Option Plan Special Stock Options
-------------------------- --------------------------
Number of Weighted Avg. Number of Weighted Avg.
Shares Ex. Price Shares Ex. Price
Balance, December 31, 1993 2,564,075 $4.8325 970,353 $2.1174
Granted 186,240 5.9798 - -
Exercised (262,754) 3.4727 (333,739) 1.0600
Canceled (222,259) 5.2684 (86,763) 1.9800
----------- ---------- ---------- ----------
Balance, December 31, 1994 2,265,302 5.0418 549,851 2.7206
Granted 1,403,000 4.6600 15,000 4.0000
Exercised (93,668) 4.0900 (98,763) 1.7400
Canceled (165,264) 4.8600 (61,737) 3.9200
----------- ---------- ---------- ----------
Balance, December 31, 1995 3,409,370 4.9200 404,351 2.8854
Granted 1,181,333 4.7600 - -
Exercised (158,751) 4.2000 (522) 2.4600
Canceled (883,967) 5.0000 (3,829) 2.3800
----------- ---------- ---------- ----------
Balance, December 31, 1996 3,547,985 $4.8600 400,000 $2.8906
=========== ========== ========== ==========
Options exercisable at
December 31, 1996(1) 1,788,480 $4.9115
=========== ==========
Options not exercisable at
December 31, 1996(2) 1,759,505 $4.8150
=========== ==========
__________________
(1) Range of price for exercisable options: $1.0625 - $7.75
(2) Range of price for non-exercisable options: $3.875 - $6.875
Summary of reserved shares
As of December 31, 1996, the Company has reserved the following
shares of Common Stock for future use as follows:
Unit purchase options. . . . . . . . . . . 118,346
1992 stock option plan . . . . . . . . . . 3,547,985
Special stock options. . . . . . . . . . . 400,000
Conversion of debentures and warrants
issued to common stockholders. . . . . . 3,039,803
---------
7,106,134
=========
(8) COMMITMENTS AND CONTINGENCIES
The Company has royalty arrangements with certain
consultants and institutions that call for royalty payments based
upon a percentage of product sales developed under the royalty
agreements. Royalty expense for the years ended December 31,
1994, 1995 and 1996 was approximately $320,000, $215,000 and
$270,000, respectively. In addition, the Company has entered
into certain research support agreements (see Note 6). Annual
minimum royalty and research support payments, as of December 31,
1996, are as follows:
For the Year
Ending
December 31, Amount
------------- ------------
1997 . . . . . . $1,049,224
1998 . . . . . . 872,224
1999 . . . . . . 130,100
2000 . . . . . . 127,600
2001 . . . . . . 127,600
Thereafter . . . 127,600
-----------
TOTAL $2,434,348
===========
The Company leases office space and laboratory facilities
under operating lease agreements which expire in periods from
1997 to 2004. Lessor concessions with respect to space buildout
and rental abatement, result in a deferred rent credit at
December 31, 1996 of $18,214. Rental expense for the years ended
December 31, 1994, 1995 and 1996 was approximately $755,000,
$717,000 and $795,000, respectively. Minimum lease payments
under these lease agreements, excluding operating expense pass-throughs, as of
December 31, 1996, are as follows:
For the Year
Ending
December 31, Amount
------------- ------------
1997 . . . . . . $ 812,703
1998 . . . . . . 831,349
1999 . . . . . . 856,294
2000 . . . . . . 881,977
2001 . . . . . . 908,437
Thereafter . . . 2,145,811
-----------
TOTAL $6,436,571
===========
In February 1995, the Company entered into a lease which was
accounted for as a capital lease with a net present value of
future obligations of approximately $1.2 million.
The Company has guaranteed a loan of an officer/director for
up to $960,000. The loan is due upon demand and collateralized
by the Company's stock owned by the officer. The $700,000 of
Company funds pledged as a guarantee for the loan are maintained
in a separate account with the lender and are included in
restricted cash in the accompanying consolidated balance sheet.
From time to time, the lender may make partial calls on the loan
due to fluctuations in the market value of the stock of the
Company collateralizing the loan. In the event the officer is
unable to repay amounts necessary to satisfy these calls or in
any other way defaults on the loan, the lender may liquidate
portions of the collateral or immediately sell shares of stock
collateralizing the loan or withdraw funds from the Company's
account. At December 31, 1996, there was a $415,000 call on the
loan. In the event the officer cannot satisfy the call, these
funds may be withdrawn from the Company's account. As of
December 31, 1996, the collateral on the loan had a value of $1.8
million. In the event of a withdrawal from the Company's
account, the Company succeeds to the rights to the collateral.
The Company has made advances to or paid expenses on behalf
of the same officer/director in an amount outstanding at December
31, 1996 of $294,039 and at December 31, 1995 of $129,192.
The University of California and its licensee, Vysis, Inc.
filed suit against Oncor in 1995 for patent infringement. In
January 1997, a summary judgment hearing was held but there has
been no decision on the motion. A failure to successfully defend
against or settle this motion may result in damages being
assessed against the Company and an injunction against the sale
of some of the Company's probe and genetic test kits.
(9) SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in one dominant business segment,
biomedical research products, with research, development,
manufacturing and marketing in the United States and Europe. The
operations in Europe were acquired through the acquisition of
Appligene in September 1994 (see Note 3).
Product sales relating to each geographic region are as
follows:
Years Ended December 31,
1994 1995 1996
United States . . . . . $ 7,383,313 $ 7,167,415 $ 6,644,041
Europe. . . . . . . . . 4,332,899 7,707,198 7,018,994
Japan . . . . . . . . . 507,290 580,514 964,762
Other . . . . . . . . . 201,338 737,709 695,370
------------ ------------ ------------
$12,424,840 $16,192,836 $15,323,167
============ ============ ============
Revenues, largely in Europe, attributable to the Company's
operations in France from the date of acquisition of Appligene to
December 31, 1994 and for the year ended December 31, 1995 and
1996 were approximately $2.1 million, $7.3 million and $7.1
million, respectively, and net loss for the same periods were
$319,978, $883,046 and $2,795,102, respectively. The Company's
identifiable assets in France at December 31, 1994, 1995 and 1996
were carried at approximately $10.4 million, $9.2 million and
$9.8 million, respectively, largely comprising goodwill.
Product sales of the Company's imaging systems to
pharmaceutical and industrial companies were approximately, $1.2
million, $0.2 million and $4,000 for the years ended December 31,
1994, 1995 and 1996, respectively. In 1996, the pharmaceutical
imaging business unit was sold for aggregate proceeds of $377,000
and a net gain of $270,000 which is included in interest and
other expenses in the accompanying income statement.
(10) RETIREMENT PLAN
In 1991, the Company adopted a defined contribution savings
plan (the "Plan") in accordance with Section 401(k) of the
Internal Revenue Code. The Plan covers all permanent employees
who have attained the age of 21. Under the Plan, the Company may
make discretionary contributions. The Company made no
discretionary contributions to date.
(11) LINE OF CREDIT
In March 1997, the Company obtained from a syndicate of
financial institutions a working capital line of credit in the
aggregate principal amount of $3.0 million. The line of credit
commitment expires and any borrowings under the line of credit
become due on March 31, 1998. In connection with this facility,
the Company granted the syndicate 300,000 warrants each
convertible into one share of common stock of the Company at
$3.875 per share. The stated rate of interest paid on any
borrowings under the facility is prime + 2%. The Company had not
borrowed under the facility as of March 31, 1997.
(12) LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the
following obligations:
1995 1996
---- ----
Convertible notes issued by the
Company in connectionwith the private
placement, bearing interest at a rate of
4.5% per year, payable quarterly, due in 1998. $7,000,000 -
Convertible notes issued by the Company in
connection with private placements, bearing
interest at a rate of 6% per year, payable
semi-annually, due in 1999 and 2001. - $8,851,589
Notes issued by the Company in connection with
an acquisition, payable in eight equal quarterly
installments, beginning December 31, 1994,
denominated in French francs, bearing interest
at a rate of 5.5% per year,guaranteed by a bank
and convertible into Common Stock of the Company
at a rate of one share for approximately $11.30
principal value of notes converted. 1,810,332 -
Obligation under capital lease bearing interest
at 5.62% (collateralized by building) with final
maturity in 2010. 1,235,504 1,075,070
Notes payable to a French government funding
agency, issued by a subsidiary, denominated
in French francs, without stated interest, due
in 1998. 623,786 477,235
Various other notes payable to banks, primarily
secured by the assets of a subsidiary. 933,942 701,553
------------ ------------
Total long-term debt
11,603,564 11,105,447
Less current maturities 2,302,156 719,337
------------ ------------
Non-current portion $9,301,408 $10,386,110
============ ============
The conversion price of the convertible notes payable at
December 31, 1996 is 100% to 80.0% of the average market price
for the Common Stock for the five consecutive trading days ending
one trading day prior to the date of the conversion notice and,
with respect to $6.0 million of such notes, the conversion price
is the lower of the aforementioned or $5.00 per share; the
conversion of the notes are also subject to certain additional
restrictions.
The aggregate maturities of long-term debt at December 31,
1996, are as follows:
1997 $ 719,337
1998 330,923
1999 3,491,497
2000 223,167
2001 5,836,187
Thereafter 504,336
-----------
TOTAL $11,105,447
===========
(13) ACCOUNTING FOR THE ISSUANCE OF CONVERTIBLE DEBENTURES
The unaudited financial position and results of operations
for the unaudited quarters ending March 31, 1996, June 30, 1996,
and September 30, 1996 have been restated to give effect to the
accounting treatment announced in March 1997 by the staff of the
Securities and Exchange Commission (SEC) at a meeting of the
Emerging Issues Task Force relevant to certain of the Company's
convertible debentures having "beneficial conversion" features.
In December 1995, August 1996 and December 1996, the Company
issued convertible debentures in private placements in exchange
for cash of $7.0 million, $5.0 million and $8.0 million,
respectively. In each such issuance, the holders of the
debentures had "beneficial conversion" rights to convert the
debentures into common shares of the Company at established
discounts to the quoted trading price of the shares in a period
immediately preceding the dates of conversions.
Under the recently announced accounting treatment, the value
of the fixed discount, ranging from 15%-20% of the respective
issuance's face value for of the Company's issuances, has been
reflected in the restated unaudited quarters as additional
interest expense in an aggregate amount of $2.6 million. Such
additional fixed discount has been accreted for the period from
date of issuance through the conversion dates of the respective
issuances.
As originally reported:
(Unaudited)
QUARTERS IN 1996
---------------------------------------------
1st 2nd 3rd
--- --- ---
Interest and other
expense, net. . . . . . $ (151,695) $ (80,932) $ 88,267
Net loss. . . . . . . . . (6,090,337) (7,727,314) (5,378,704)
Net loss per share. . . . (0.28) (0.34) (0.23)
As restated:
(Unaudited)
QUARTERS IN 1996
---------------------------------------------
1st 2nd 3rd
--- --- ---
Interest and other
expense, net. . . . . . $ (660,695) $ (795,932) $ (822,733)
Net loss. . . . . . . . . (6,599,337) (8,442,314) (6,289,704)
Net loss per share. . . . (0.30) (0.37) (0.27)
The restatements did not affect cash flows of the Company,
working capital, or loss from operations.
(14) SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Inventories
Inventories consist of genetic probes, hybridization systems
and reagents in various manufactured states. They are stated at
lower of cost (first-in, first-out) or market.
Inventories consist of the following:
As of December 31,
----------------------------
1995 1996
---- ----
Raw materials . . . . . . . . . . . $2,488,974 $1,595,485
Work in process . . . . . . . . . . 1,808,956 1,043,611
Finished goods. . . . . . . . . . . 2,058,111 1,200,534
---------- ----------
$6,356,041 $3,839,630
========== ==========
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are calculated on a straight-line basis over the
estimated useful lives of the assets. The building is
depreciated over fifteen years. Laboratory equipment is
depreciated over seven years. Office equipment, furniture and
fixtures are depreciated over seven and three years,
respectively. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the applicable lease
term.
Property and equipment consist of the following:
As of December 31,
----------------------------
1995 1996
---- ----
Building . . . . . . . . . . . . . $1,235,504 $1,155,338
Laboratory equipment . . . . . . . 4,631,090 3,713,500
Office equipment, furniture and
fixtures . . . . . . . . . . . . 5,190,596 5,011,235
Leasehold improvements . . . . . . 1,455,072 1,015,180
------------ ------------
12,512,262 10,895,253
Less -- Accumulated depreciation
and amortization . . . . . . . . (5,067,048) (5,850,983)
------------ ------------
Net property and equipment . . . . $7,445,214 $5,044,270
============ ============
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of
the following:
As of December 31,
----------------------------
1995 1996
---- ----
Employee benefits. . . . . . . . . $621,234 $ 512,063
Accrued royalties. . . . . . . . . 105,832 125,025
Deferred rent, current portion . . 72,858 18,214
Unbilled professional fees . . . . 192,403 280,000
Deferred revenue . . . . . . . . . 267,947 73,933
Sales taxes. . . . . . . . . . . . 85,462 4,099
Liability to the market maker in
subsidiary stock (Note 4). . . . - 500,000
Other. . . . . . . . . . . . . . . 250,467 143,566
----------- -----------
$1,596,203 $1,656,900
=========== ===========
Deposits and Other Non-Current Assets
Deposits and other non-current assets as of December 31,
1995 consist primarily of debt issuance costs of $537,869. The
costs related to the issuance of debt are capitalized and
amortized to interest expense using the effective interest method
over the lives of the related debt.
Investments in Debt Securities at December 31, 1996
The aggregate fair value of investments in debt securities
as of December 31, 1996 was $397,353, which was commercial paper.
Gross unrealized holding gains and losses and the difference
between amortized cost basis and aggregate fair value as of
December 31, 1996 are not material.
Supplemental Schedule of Non-cash Investing and
Financing Activities
Transactions relating to the issuance of shares of its
Common Stock by the Company in connection with conversion of
convertible debt during 1996 are as follows:
DATE SHARES ISSUED VALUE
------------- ------------- --------------
December 472,638 $1,475,000
November 39,346 125,000
August 260,209 950,000
April 834,894 3,950,000
March 498,081 2,100,000
------------- --------------
2,105,168 $8,600,000
============= ==============
In February 1995, the Company entered into a $1.2
million capital lease of a building. In May 1994, the Company
issued a note payable of $1.2 million and 200,000 shares of the
Company's Common Stock with a value of $1.02 million as partial
consideration for the acquisition of the Apple Computer based
imaging line of business (Note 3). In September 1994, the
Company issued a note payable of $4.5 million and 635,631 shares
of the Company's Common Stock with a value of $3.1 million as
partial consideration for the acquisition of Appligene.
PART III
For information concerning Item 10, Directors and Executive
Officers of the Registrant, Item 11, Executive Compensation,
Item 12, Security Ownership of Certain Beneficial Owners and
Management and Item 13, Certain Relationships and Related
Transactions, see the definitive proxy statement of Oncor, Inc.,
relative to the Annual Meeting of Shareholders to be held in
July 1997, to be filed with the Securities and Exchange
Commission, which information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents Filed as a Part of this Form 10-K:
1. Financial Statements. The following consolidated
financial statements of Oncor, Inc. and report of
independent public accountants relating thereto
are filed with this Report.
Report of Independent Public Accountants on
Financial Statements
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
2. Financial Statement Schedules. The following
consolidated financial statement schedules of
Oncor, Inc. are filed with this Report.
Report of Independent Public Accountants on
Schedule
Schedule II - Valuation and Qualifying Accounts
Information
(No other financial schedules are required.)
3. Exhibits.
3 Articles of Incorporation and By-Laws
3.1 Articles of Amendment filed with Department
of Assessments and Taxation of the State of
Maryland on August 6, 1992 to Fourth Amended
and Restated Articles of Incorporation of
Oncor, Inc. (Filed as Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 and
incorporated herein by reference.)
3.2 By-Laws of Oncor, Inc., as amended and
restated on November 6, 1990. (Filed as
Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1990 and incorporated herein by
reference.)
4 Instruments defining the rights of security-holders,
including indentures.
4.1 Specimen certificate for shares of the
Registrant's Common Stock. (Filed as Exhibit
4.1 to the Registrant's Registration
Statement No. 33-44520 and incorporated
herein by reference.)
4.22 Provisions of the Articles of Incorporation
and By-Laws defining rights of holders of
Common Stock of the Registrant. (Filed as
Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1993 and as Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990,
respectively, and incorporated herein by
reference.)
10 Material Contracts.
10.1 HPV Diagnostics Agreement of September 1988
with Medscand AB. (Filed as Exhibit 19.1 to
the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1988
and incorporated herein by reference.)
10.2 Unit Purchase Option dated May 25, 1989
between Oncor, Inc. and D.H. Blair & Co.,
Inc., along with a schedule of nearly
identical unit purchase options issued to
other parties. (Filed as Exhibit 10.33 to
the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989
and incorporated herein by reference.)
10.3 Stock Option Agreement dated October 18, 1989
between Oncor, Inc. and Taylor & Turner, L.P.
(Filed as Exhibit 10.41 to the Registrant's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1989 and incorporated
herein by reference.)
10.4 Stock Option Agreement dated October 18, 1989
between Oncor, Inc. and Rotan Mosle
Technology Partners Ltd. (Filed as Exhibit
10.41 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1989 and incorporated herein by
reference.)
10.5 Stock Option Agreement dated October 18, 1989
between Oncor, Inc. and Charles Atwood
Company. (Filed as Exhibit 10.42 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989 and
incorporated herein by reference.)
10.6 Stock Option Agreement dated October 18, 1989
between Oncor, Inc. and Stanton-Barnes
Company. (Filed as Exhibit 10.43 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989 and
incorporated herein by reference.)
10.7 Stock Option Agreement dated February 8, 1990
between Oncor, Inc. and John Pappajohn.
(Filed as Exhibit 19.4 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1990 and incorporated
herein by reference.)
10.8 Lease dated March 22, 1990 between Oncor,
Inc. and Avenel Executive Park Phase II, Inc.
(Filed as Exhibit 19.6 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1990 and incorporated
herein by reference.)
10.10 Stock Option Agreement dated November 20,
1990 between Oncor, Inc. and John Pappajohn.
(Filed as Exhibit 10.52 to the Registrant's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 and incorporated
herein by reference.)
10.13 Lease dated June 28, 1991 between Oncor, Inc.
and Avenel Associates Limited Partnership.
(Filed as Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 and incorporated
herein by reference.)
10.14 Distribution Agreement dated November 28,
1991 between Oncor, Inc. and Medical Systems.
(Filed as Exhibit 10.15 to the Registrant's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 and incorporated
herein by reference.)
10.15 Lease dated March 22, 1990 between Oncor,
Inc. and Avenel Executive Park Phase II,
Inc., as amended on February 25, 1991 and
June 21, 1991. (Filed as Exhibit 10.15 to
the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994
and incorporated herein by reference.)
10.16 First Amendment to the Lease dated
June 28, 1991 between Oncor, Inc. and Avenel
Executive Park Phase II, Inc. (Filed as
Exhibit 10.16 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by
reference.)
23 Consent of Independent Public Accountants to
incorporation of reports in Company's Annual
Report on Form 10-K for fiscal year 1996 into
the Company's previously filed S-3
Registration Statements, File Nos. 333-85 and
333-735, 333-11997, and 333-20425, and into
the Company's previously filed S-8
Registration Statement, File No. 33-81021.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
ONCOR, INC.
Date: March 31, 1997 By
Stephen Turner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date Signature Title
March 31, 1997 Chairman of the
Stephen Turner Board of Directors,
Chief Executive
Officer (Principal
Executive Officer)
March 31, 1997 President, Chief
Cecil Kost Operating Officer
and Director
March 31, 1997 Vice President,
John L. Coker Secretary and
Treasurer
(Principal Financial
Officer)
March 31, 1997 Director
Timothy J. Triche
March 31, 1997 Director
Philip S. Schein
March 31, 1997 Director
William H. Taylor II
March 31, 1997 Director
Glenn W. Bartlett
March 31, 1997 Director
Derace L. Schaffer
March 31, 1997 Director
Jose J. Coronas
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
ONCOR, INC.
Date: March 31, 1997 By /s/ Stephen Turner
Stephen Turner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date Signature Title
March 31, 1997 /s/ Stephen Turner Chairman of the
Stephen Turner Board of Directors,
Chief Executive
Officer (Principal
Executive Officer)
March 31, 1997 /s/ Cecil Kost President, Chief
Operating Officer
and Director
March 31, 1997 /s/ John L. Coker Vice President,
John L. Coker Secretary and
Treasurer
(Principal Financial
Officer)
March 31, 1997 /s/ Timothy J. Triche Director
Timothy J. Triche
March 31, 1997 /s/ Philip S. Schein Director
Philip S. Schein
March 31, 1997 /s/ William H. Taylor II Director
William H. Taylor II
March 31, 1997 /s/ Glenn W. Bartlett Director
Glenn W. Bartlett
March 31, 1997 /s/ Derace L. Schaffer Director
Derace L. Schaffer
March 31, 1997 /s/ Jose J. Coronas Director
Jose J. Coronas
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To Oncor, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of Oncor, Inc., and
subsidiaries included in this Form 10-K and have issued our report
thereon dated March 28, 1997. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken
as a whole. The schedule listed in the index is the responsibility
of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 28, 1997
ONCOR, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to Additions Balance
beginning expenses due to at end of
of period (recoveries) Acquisitions Write-offs period
---------- ------------ ------------- ----------- ---------
December 31, 1994
- -----------------
Allowance for
doubtful accounts 176,080 (57,399) 68,304 (13,634) 173,351
December 31, 1995
- -----------------
Allowance for
doubtful accounts 173,351 200,295 - (32,764) 340,882
December 31, 1996
- -----------------
Allowance for
doubtful accounts 340,882 73,408 - (42,306) 371,984
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed S-3 Registration Statement File Nos. 333-85, 333-735,
333-11997 and 333-20425, and into S-8 Registration Statement
File No. 33-81021.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 28, 1997