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, 1997
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.
At February 28, 1998, there were 28,028,366 shares of Common
Stock outstanding. The aggregate market value of the voting
stock held by non-affiliates was approximately $115,576,825 at
that date. Document incorporated by reference: Proxy Statement
of Oncor, Inc. relative to the Annual Meeting of Shareholders to
be held in June 1998, which is incorporated into Part III of this
Form 10-K.
TABLE OF CONTENTS
PART I
Item Page
1. Business. . . . . . . . . . . . . . . . . . . . . . . .1
2. Properties. . . . . . . . . . . . . . . . . . . . . . .28
3. Legal Proceedings . . . . . . . . . . . . . . . . . . .28
4. Submission of Matters to a Vote of Security Holders . .29
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . .30
6. Selected Consolidated Financial Data. . . . . . . . . .31
7. Management's Discussion and Analysis of
Financial Condition and Results of Operation. . . . . .32
8. Consolidated Financial Statements
and Supplementary Data. . . . . . . . . . . . . . . . .41
9. Changes in and Disagreements on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . .41
PART III
10. Directors and Executive Officers of the Registrant. . .42
11. Executive Compensation. . . . . . . . . . . . . . . . .42
12. Security Ownership of Certain
Beneficial Owners and Management. . . . . . . . . . . .42
13. Certain Relationships and Related Transactions. . . . .42
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . .43
Signatures. . . . . . . . . . . . . . . . . . . . . . .47
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 or improving 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.
The Company is actively seeking the sale or other conveyance
of its two non-strategic business units: research products and
non-oncology genetic probe systems. If either division is
disposed of, the scope of the Company's business, its number of
products and number of customers will be reduced significantly.
If both units are disposed of, its INFORM(TM) HER-2/neu
diagnostic test may be its sole remaining product presently
marketed to North America, which currently is sold to a limited
number of customers. The Company expects that the disposal of
each of these units will result in a significant decrease in the
number of employees in the Company, through assimilation by the
acquiring entity or by termination. All information provided in
this Business section should be read in conjunction with these
plans.
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 prognosis. In
November 1996, the Company underwent a successful FDA inspection
for the conduct of its clinical trials for the INFORM(TM)
HER-2/neu test. In June 1997, the Company completed clinical,
reproducibility and training requirements requested by FDA and
submitted the results of the studies to the FDA. Additionally in
June 1997, FDA completed its pre-PMA inspection of the Company's
manufacturing and quality systems. Based on the results of the
inspection, the PMA was recommended for approval by the
Inspection District Office. In December 1997, the PMA for the
Oncor INFORM(TM) HER-2/neu Gene Detection System was approved for
marketing by FDA. The product was launched within 30 days of
approval following submission of copies of the final labeling to
the FDA. 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
Chicago, The Children's Hospital of Philadelphia, Yale
University, the Massachusetts General Hospital, University of
Utah and Princeton University.
The Company is currently evaluating its institutional
agreements with a view toward significantly reducing the expenses
associated with maintaining them. Accordingly, management
expects that the number and scope of these agreements will be
reduced significantly in the near future, consistent with the
terms of each such agreement.
Products
The Company's principal products include: (1) the
INFORM(TM) HER-2/neu Gene Detection System for the prognosis of
breast cancer, (2) integrated research 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 (3) molecular biology reagents,
enzymes and instruments for the research market. 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 FDA approved product is marketed worldwide for
in vitro diagnostic use. However, the majority of the Company's
products are currently sold 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 or clearance 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 or that the FDA
will continue to allow widespread marketing of research products
without certification.
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 has also constructively withdrawn its current PMA filing
at the FDA for its leukemia detection test for Chronic
Myelogenous Leukemia ("CML") and its test system for the
detection of certain strains of Human Papilloma Virus ("HPV"), in
order to (i) respond to requests and questions provided by the
FDA and (ii) consider the possible reconfiguration of the test
system and resubmission of a PMA or alternate regulatory pathway
for marketing. With respect to the B/T Blue, CML, and HPV 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, predicting
which tumors may recur.
The Company completed clinical trials of its Her-2/neu
amplification test system for breast cancer and filed a PMA
application in February 1994. In November 1996, the Company
underwent a successful FDA inspection of the conduct of its
clinical trials for the INFORM(TM) HER-2/neu test. In June 1997,
the Company completed clinical, reproducibility and training
requirements requested by FDA and submitted the results of the
studies to the FDA. Additionally in June 1997, FDA completed its
pre-PMA inspection of the Company's manufacturing and quality
systems. Based on the results of the inspection, the PMA was
recommended for approval by the Inspection District Office. In
December 1997, the PMA for the Oncor INFORM(TM) HER-2/neu Gene
Detection System was approved for marketing by FDA. The product
was launched within 30 days of approval following submission of
copies of the final labeling to the FDA. 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 also has approval to market its INFORM(TM)
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
commenced marketing for diagnostic purposes in these countries in
1997.
In 1997, the Company terminated an exclusive world-wide
license and a sponsored research agreement with Tel Aviv
University's Sackler School of Medicine ("Sackler") with respect
quantities of p43 antigen in human blood, once considered to be a
breast cancer marker.
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, with final approval
dependent upon completion of a pre-approval inspection and
submission of final labeling within 180 days of the letter. 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 PMA application
on file with FDA is considered to have been constructively
withdrawn until at which time the Company conducts, among other
things, additional clinical trials and refiles the PMA
application with the additional information. 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, and a 4-site pre-clinical trial has begun to provide
additional validation data for this assay approach.
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 and March 1998, U.S. Patent
Nos. 5,561,041 and 5,726,019, respectively, were issued to Johns
Hopkins which relate to this technology, which is licensed
exclusively to the Company. In September 1997, the Company
received a $100,000 SBIR grant from the National Cancer Institute
to conduct feasibility studies on a unique approach to detection
of rare cancer cells containing point mutations in the ras or p53
genes. Successful completion of this work in 1998 will be
required for commercialization of this test for early detection
of lung cancer. There are no assurances that this development
work will result in a product at this time.
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 offered for clinical
service 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. A U.S. patent relating
to the technology was issued in January 1997. The Company is a
party to an interference proceeding declared by the PTO involving
Beckman Instruments, Inc.'s ("Beckman") and the Company's claims
regarding that application. There can be no assurance as to the
length of time for a decision to be rendered, or the nature of
the decision, in this interference proceeding or any potential
appeal therefrom. If it is determined that Beckman's patent
claims have priority over the Company's claims, the Company may
have no patent claim or protection with respect to the Company's
TRI-AMP(TM) technology, which could prevent or limit the
Company's ability to commercialize the Company's TRI-AMP(TM)
technology, absent a license from Beckman. This could have a
material and adverse effect on the Company's business, financial
condition or results of operations. The Company has chosen not
to contest priority in the interference.
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. Oncor announced a licensing agreement in
October 1997 with R&D Systems which will enable them to
distribute Oncor's Sunrise(TM) technology in kits to measure
cytokine mRNA. Another agreement was signed with Becton
Dickinson in March 1998, for the use of Sunrise(TM) technology in
their diagnostic products. On March 16, 1998, Oncor announced it
had secured certain rights to a novel amplification technology
called Rolling Circle Amplification Technology ("RCAT") from Yale
University in the fields of cancer, infectious disease, molecular
genotyping and pharmacogenetics for diagnostic purposes. Oncor
will also participate in a three-member limited liability company
along with Yale and Molecular Staging, Inc. to further
commercialize RCAT through sublicenses. Several U.S. patent
applications relating to the technologies are pending. In 1997,
the Company received two SBIR grants from the NIH to support
further development of the Sunrise(TM) technology and the RCAT.
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 and has been allowed. 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. There is
no assurance that the FDA will allow continued marketing of
research use products except to certified research parties.
OncorMed
As more fully described in Note 5 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 1994 and 29%
in 1996. In February 1997, OncorMed was granted a non-exclusive
license in exchange for approximately 0.7 million shares of
stock, and the Company's ownership interest was subsequently
reduced to 25%. 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 5 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,
beginning in 1996, the Company's ownership interest was reduced
to approximately 42% of Codon's outstanding capital stock and
remained at that level throughout 1997. Accordingly, for the
fiscal periods presented in the accompanying financial
statements, Codon was not 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. In February 1998, the Company exchanged
approximately 1.65 million shares of its common stock for all the
outstanding shares of Codon not held by the Company. The effect
of this transaction was to increase the Company's ownership of
Codon to 100%.
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 40 employees engaged in research and
development, including 34 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 32 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, to clinical and research laboratories 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.
The marketing plan for the INFORM(TM) HER-2/neu Gene
Detection System includes convincing medical oncologists,
surgical oncologists, pathologists and patients of the value of
the Company's FDA approved assay.
The Company's strategy to create demand focused on clear
promotion of INFORM(TM) through direct sales contact by the
Company's sales representatives, advertising in key oncology and
pathology journals and consumer periodicals, establishing
standardization with large oncology groups, and working with
breast cancer advocacy groups. The Company's web site acts as a
source of information and direction 24 hours a day.
The Company has a number of ongoing discussions with
oncology cooperative groups, individual investigators, major
reference labs and pharmaceutical companies on clinical studies
planned to investigate the further clinical utility of
INFORM(TM).
The Company has added both reimbursement and clinical
expertise to its marketing plan with the addition of
Comprehensive Reimbursement Consultants and Ask the Pharmacist,
Inc. These two organizations are extending the Company's reach
to help its customers more readily use INFORM(TM) on a regular
basis. The Company is planning to extend its marketing reach
with co-marketing efforts from other aligned diagnostic and
oncology focused companies.
The Company will be present with INFORM(TM) at all the major
U.S. oncology trade shows to demonstrate its commitment to
provide exposure, support and education to the Company's key
customers.
In the U.S., the Company presently has 11 sales
representatives and several marketing personnel supporting the
launch and commercialization of INFORM(TM). These sales
representatives are also in a position to expand the present
usage of the Company's existing oncology genetic line with these
same key customers.
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. Alternatively, the Company could pursue FDA Pre-Market
Notification (510(k) application) for selected products,
requiring that the Company submit evidence of substantial
equivalence to previously marketed products. Both types of
submissions typically entail providing evidence established
through 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 by the FDA 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 or clearance for each product and, on a
continuing basis, the FDA must, under the Food, Drug and Cosmetic
Act, inspect the manufacturing facilities and procedures for
compliance with its GMP regulations.
Effective in November 1998, a third method for marketing,
specifically via Analyte Specific Reagents ("ASRs"), will be
available to FDA regulated in vitro diagnostic companies. ASRs
do not require a submission to FDA prior to marketing, however,
they do require compliance with FDA current Good Manufacturing
Practices along with other specified labeling restrictions and
reporting requirements. Some of the Company's products may
qualify for marketing as ASRs.
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 six 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 2015.
Two of the patents, issued June 6, 1995 and December 2, 1997
and licensed exclusively to the Company by Princeton University,
relate 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 TECHTM 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. The fifth
U.S. patent relates to novel labelled nucleotides developed by
the Company, and the sixth U.S. patent relates to an aspect of
the Company's mutation detection 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 enhancing fluorescent
signals and detecting amplification products. In addition, Codon
has pending patent applications which relate to various aspects
of its gene repair technology, oligonucleotide analogs and small
molecule pharmaceuticals. 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
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
had 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 was 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 both parties.
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),FLUOR-AMP(R), QUINT-ESSENTIAL(R),
TRAPEZE(R) and the ONCOR Man Design are registered trademarks of
the Company. In addition to these trademarks, the Company is
currently using the unregistered trademarks OPTICYTE(TM),
BLOCKIT(TM), HYB-BATH(TM), B/T BLUE(TM), EX-WAX(TM), RNA
PREP(TM), TEMPLATE-TAMER(TM), ONCOR ARCHIVE(TM), INFORM(TM)
APOPNEXIN(TM), APOPTEST(TM), D-FISH(TM), S-FISH(TM), and
SUNRISE(TM), and has applied for the registration of the latter
six marks. The Company has filed applications to register
CpGWIZ(TM), GREEN CAP(TM), GREEN COAT(TM), RCA(TM), RED CAP(TM),
RED COAT(TM), ROLLING CIRCLE AMPLIFICATION(TM) and TRI-AMP(TM),
which the Company intends to use as trademarks. Also, Codon has
filed an application for CODON(TM), which it intends to use as a
trademark. 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 number of patents and trademarks practiced by the
Company will be substantially reduced if the Company is
successful in disposing of either or both of its non-strategic
business units.
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 199 employees at February 28, 1998,
including 44 research, clinical and related laboratory personnel;
64 employees in sales and marketing; and 91 employees in
administration, finance, regulatory affairs, production and
distribution. Of these employees, 73 reside and work in Europe.
Of the 44 laboratory employees, 32 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.
As noted above, the number of employees in each category
will be substantially reduced if the Company is successful in
disposing of either or both of its two non-strategic business
units.
Additional Risk Factors
History of Operating Losses
Oncor has not been profitable since its inception in
July 1983. For the year ended December 31, 1997, the Company
incurred net losses of approximately $31 million. As of December
31, 1997, the accumulated deficit of the Company was $133
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.
Additional Financing Requirements and
Access to Capital Funding
The Company expects that its current liquid resources will
not be sufficient to fund operations after the end of April 1998.
Funds, if any, raised from most of the possible sources during
the intervening period must first be utilized to repay the
Company's bank debt of $3.0 million in accordance with the terms
of the underlying line of credit and related guarantees. The
line of credit, which expires on October 31, 1998, is guaranteed
by certain shareholders whose guarantees are secured by
substantially all of the assets of the Company.
The Company is considering alternative forms of financing,
including among other things, equity or debt financing, sale of
significant assets which may result from the previously announced
retention of Lehman Brothers by the Company to explore strategic
alternatives to increase stockholder value, including sale of the
Company, sale of publicly-traded OncorMed common stock, third
party funding of Codon for future cash requirements and recovery
of Oncor advances to Codon and other alternatives.
At March 25, 1998, two of the alternative forms of financing
were in a more advanced stage of discussions, but no final
agreements in principle or definitive agreements had been
reached. First, the Company has received a non-binding term
sheet from a prospective purchaser for a small division of the
Company. Second, the Company has received a non-binding term
sheet which, if certain conditions are met, would permit the
Company to exercise, prior to its currently scheduled July 1998
exercise date, its put option in connection with the January 1998
private placement of convertible preferred stock, and sell up to
$7.5 million of additional convertible preferred stock. Among
other numerous conditions, one such alternative would require a
waiver from the guarantors of the $3.0 million line of credit.
There can be no assurance that either of the two
alternatives discussed above, or any of the other such forms of
financing can be completed by the Company in sufficient amounts
in timely fashion on acceptable terms, or at all, which would
have a material adverse effect on the Company. Even if
completed, each of such financing alternatives may have certain
terms, conditions or ramifications which may have a material
adverse effect on the Company's business, financial condition and
results of operations. For instance, any such equity financings
likely will be dilutive to stock holders, the terms of any debt
financing, as does the existing line of credit, may require
substantially all of the assets of the Company to be pledged as
collateral, may involve warrant or equity dilution and/or may
contain restrictive covenants which limit the Company's ability
to pursue certain courses of action, and the sale of assets will
decrease the revenue base of the Company.
While the Company is using its best efforts to consummate
one or more of these potential sources of funding, it is possible
that the success, if any, of these efforts will not be sufficient
to fund the Company for the foreseeable future at its present
level of operations. In the event that the Company is unable to
raise additional capital by the end of April 1998, the Company
may promptly cease significant portions of its programs, projects
and business operations. If the pursuit of these potential
funding sources proves largely unsuccessful, the Company may be
forced into the complete termination of its business operations.
The Company holds 2.0 million shares of common stock in
OncorMed, Inc., a publicly traded affiliate of the Company, whose
shares have traded in the past three months in the range of
$5.375 to $7.50 per share. The Company is restricted from
selling 0.9 million such shares in the public markets due to
outstanding options it has issued pursuant to which the Company
has offered to sell the shares to the option holders for $4.75 to
$6.00 per share. While exercise of such options would generate
cash of approximately $4.7 million, such exercise is outside the
control of the Company. The remaining 1.1 million shares of
common stock of OncorMed can be sold in the public markets only
pursuant to restrictions imposed by the SEC such that the
complete liquidation of this position in the public markets
likely would take a year or more. Trading activity in OncorMed
stock is limited, which would further restrict the Company's
ability to liquidate a significant portion of its position. The
Company is also considering attempting to secure a purchaser for
a block of the stock in a private transaction.
Risk Associated with the INFORM(TM) Her-2/neu Gene-Based
Test System
Although the PMA for the Oncor INFORM(TM) HER-2/neu Gene
Detection System was approved for marketing by FDA in December
1997, 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. In addition, product approvals may be
withdrawn if compliance with regulatory standards is not
maintained or if substantial problems occur after the product
reaches the market.
No Assurance of Regulatory Approvals; Government Regulation
The Company expects to pursue FDA approval or clearance of
certain existing products and products under development. There
can be no assurance that the Company will receive regulatory
approval or clearance for any of its products currently under
development or, even if it does receive regulatory approval or
clearance for a particular product, that the Company will ever
recover its costs in connection with obtaining such approval or
clearance. The timing of regulatory decisions is not within the
control of the Company. The failure of the Company to receive
requisite approval or clearance, or significant delays in
obtaining such approval or clearance, could have a material and
adverse effect on the business, financial condition and results
of operations of the Company.
Approval or clearance by the FDA require lengthy, detailed
and costly laboratory procedures, clinical testing procedures and
application preparation and defense efforts to demonstrate a
product's efficacy and safety (or equivalence to a marketed
product in the case of a 510(k) submission) before a product can
be sold for diagnostic use. Even if such regulatory approval or
clearance 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 in the
United States District Court for the Northern District of
California (the "Court"), alleging 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 which are present in the hybridization probe. The
Company filed motions for summary judgment of invalidity,
non-infringement and unenforceability of the patent claims in
suit, which were denied in August and December 1997. In August
1997, the Court granted Vysis' motion for summary judgment on
novelty and non-obviousness with respect to the patent, and
granted in part and denied in part Vysis' motion for summary
judgement that the patent in suit is infringed. The Company
also filed a motion which would have permitted an immediate
appeal to have been taken on claim interpretation and
invalidity issues, but was denied in October 1997. On
February 3, 1998, the Company notified the Court that it
intended to concede that the Company's probes, when used
with metaphase chromosomes infringed the Vysis patent.
On March 20, 1998, Vysis filed a motion requesting that
the Court (i) establish that use of the Company's INFORM(TM)
product infringes the patent in suit, or alternatively that
the Company be precluded from presenting evidence that such use
would infringe the patent in suit, (ii) permit Vysis to present
to the jury at trial evidence concerning the Company's alleged
failure to produce documents and false statements, and (iii)
direct the Company to pay to Vysis approximately $42,500. The
Company intends to oppose that motion. A trial date of April 20,
1998 has been set by the Court to litigate the remaining issues.
The Company and Vysis have entered into discussions, including
proposals and counterproposals, with the objective of settling
all claims prior to trial. If settlement is reached on terms
substantially similar to those contemplated in the discussions,
the Company will assume certain significant obligations. 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 most of the Company's probes and
genetic test kits, either of which would likely have a material
and adverse effect on the Company's business, financial condition
or results of operations.
One of the Company's patent applications asserts patent
rights to the Company's TRI-AMP(TM) technology. The Company is a
party to an interference proceeding declared by the PTO involving
Beckman Instruments, Inc.'s ("Beckman") and the Company's claims
regarding that application. There can be no assurance as to the
length of time for a decision to be rendered, or the nature of
the decision, in this interference proceeding or any potential
appeal therefrom. If it is determined that Beckman's patent
claims have priority over the Company's claims, the Company may
have no patent claim or protection with respect to the Company's
TRI-AMP(TM) technology, which could prevent or limit the
Company's ability to commercialize the Company's TRI-AMP(TM)
technology, absent a license from Beckman. This could have a
material and adverse effect on the Company's business, financial
condition or results of operations. The Company has chosen not
to contest priority in the interference.
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 other than the
INFORM(TM) HER-2/neu Gene Detection System 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 or
clearance for other products, and substantial additional
investment, laboratory development, clinical testing, controlled
manufacturing and FDA approval or clearance 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 or clearances 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 $7.9 million, or 61% of
its total product revenues, from customers outside of the United
States for the year ended December 31, 1997. The Company
anticipates that a significant amount of its sales will take
place in European countries and Japan 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 or clearances 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 1998. 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 or cleared 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, training
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 training, 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 25% and 80% of the common
stock of its publicly-traded affiliates, OncorMed and Appligene,
respectively, and 100% of the outstanding capital stock
securities of its privately held subsidiary, 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, are directors of 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 is presently seeking additional funding from other sources
to continue its research efforts, although there can be no
assurance that the Company will be able to obtain such funding on
commercially reasonable terms, if at all. The Company expects to
continue to advance funds to Codon until such time, if ever, as
Codon secures sufficient funding from third parties.
Nevertheless, the Company could elect to withdraw such support at
any time, which would likely necessitate Codon ceasing operations
and which 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 sale, distribution and use of the Company's FDA approved
breast cancer product in the United States is restricted to
prescription use in that the users of the product must be trained
and demonstrated proficient in the use of the product and the
results of the proficiency testing provided as part of the
Company's training program must be provided in the Company's
Annual Reports to the FDA. The Company's products sold in the
United States for research purposes, only, 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 research products can only be sold in the United States
to a limited number of customers for limited use and can only be
sold for broader commercial use with FDA approval or clearance or
pursuant to recent Analytic Specific Reagent regulations for
which no clinical claims can be made. No assurance can be given
that the Company will receive FDA approval or clearance for its
research 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 national governments. 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. In the past year, the U.S. FDA Modernization Act
("FDAMA") was approved, bringing many changes to FDA regulations
and codifying some current practices. In addition, 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.
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 81,000 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 it will not
require additional space in the foreseeable future. The Company
will likely have excess space under lease, if it is successful in
disposing of either or both of its non-strategic business units.
There can be no assurance that the Company will be able to
sublease or terminate the prime lease for such space, on an
economic basis, if at all.
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, Inc.
("Vysis"), filed suit against Oncor on September 5, 1995 in the
United States District Court for the Northern District of
California (the "Court"), alleging 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 which are present in the hybridization probe. The
Company filed motions for summary judgment of invalidity,
non-infringement and unenforceability of the patent claims in
suit, which were denied in August and December 1997. In August
1997, the Court granted Vysis' motion for summary judgment on
novelty and non-obviousness with respect to the patent, and
granted in part and denied in part Vysis' motion for summary
judgement that the patent in suit is infringed. The Company
also filed a motion which would have permitted an immediate
appeal to have been taken on claim interpretation and invalidity
issues, but was denied in October 1997. On February 3, 1998,
the Company notified the Court that it intended to concede that
the Company's probes, when used with metaphase chromosomes
infringed the Vysis patent. On March 20, 1998, Vysis filed a
motion requesting that the Court (i) establish that use of the
Company's INFORM(TM) product infringes the patent in suit, or
alternatively that the Company be precluded from presenting
evidence that such use would infringe the patent in suit,
(ii) permit Vysis to present to the jury at trial evidence
concerning the Company's alleged failure to produce documents
and false statements, and (iii) direct the Company to pay to Vysis
approximately $42,500. The Company intends to oppose that motion.
A trial date of April 20, 1998 has been set by the Court to
litigate the remaining issues. The Company and Vysis have entered
into discussions, including proposals and counterproposals, with
the objective of settling all claims prior to trial. If settlement
is reached on terms substantially similar to those contemplated in
the discussions, the Company will assume certain significant
obligations. 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 most of the Company's probes
and genetic test kits, either of which would likely have a material
and adverse effect on the Company's business, financial condition
or results of operations.
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." 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:
High Low
---- ---
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
1997
First Quarter. . . . . . . . . . . . 5-1/4 3-3/8
Second Quarter . . . . . . . . . . . 4-5/8 3
Third Quarter. . . . . . . . . . . . 5-3/16 3-9/16
Fourth Quarter . . . . . . . . . . . 5-1/4 3-1/2
HOLDERS
As of December 31, 1997, the approximate number of record
holders of Common Stock was 424.
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, 1993, 1994, 1995, 1996 and 1997 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, 1996 and 1997 and for each of the years in the
three-year period ended December 31, 1997, together with the
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,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations
Data:
Gross revenues:
Product sales . . . $9,238 $12,425 $16,193 $15,323 $12,949
Grant revenue . . . 62 342 894 483 208
Contract revenue. . - 48 300 200 200
--------- --------- --------- --------- ---------
Total gross
revenues. . . . 9,300 12,815 17,387 16,006 13,357
--------- --------- --------- --------- ---------
Operating expenses:
Direct cost of
sales . . . . . 4,376 7,254 8,279 9,656 8,515
Repositioning
expense . . . . - - - 2,075 -
Amortization of
intangible
assets. . . . . - 414 1,339 1,323 1,157
Selling, general
and
administrative. 7,575 9,539 13,752 15,073 14,825
Research and
development . . 9,117 9,609 10,422 9,822 9,232
Write off acquired
R&D projects
in process. . . - 3,574 - - -
--------- --------- --------- ---------- ---------
Total operating
expenses . . . . . . 21,068 30,390 33,792 37,949 33,729
--------- --------- --------- ---------- ---------
Loss from operations . (11,768) (17,575) (16,405) (21,943) (20,372)
Other income
(expenses), net . . 681 (2,003) (1,825) (7,037) (10,575)
--------- --------- --------- ---------- ---------
Net loss. . . . . . . $(11,087) $(19,578) $(18,230) $(28,980) $(30,947)
========= ========= ========= ========= =========
Net loss per
share(1). . . . . . $(0.71) $(1.01) $(0.87) $(1.26) $(1.21)
Weighted average
shares outstanding. 15,558 19,437 20,888 23,031 25,547
December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and liquid
investments,
including
restricted cash. . . $18,587 $23,301 $15,830 $18,880 $4,997
Total assets . . . . . 29,201 51,525 46,121 41,670 $23,884
Long-term liabilities. 164 2,513 9,320 10,386 6,126
Accumulated deficit. . (34,848) (54,427) (72,657) (101,637) (132,584)
Stockholders' equity . 24,186 40,279 25,987 23,344 3,188
_________________
(1) 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 notes payable to stockholders have
not been considered, since the effects would be antidilutive.
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 and in the Company's
other public filings 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 has incurred significant cash losses throughout
its existence and has no immediate expectations to achieve cash
positive operations. The Company's current cash resources are
nearly depleted and any cash infusions would likely be required
to be utilized first to repay bank debt obligations of $3.0
million. As described in "Liquidity and Capital Resources"
below, the Company has identified several potential sources of
additional capital. There can be no assurance that any of these
sources will provide the capital necessary for the Company to
continue its operations at their current levels, or at all. The
inability of the Company to obtain additional financing would
have a material adverse effect on the Company's business,
financial condition and results of operations, including possibly
requiring the Company to curtail or cease its operations.
The Company's sales to date have consisted primarily of
sales of products used for research purposes. 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. 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 January 1998, the Company completed a $5 million equity
financing in a private placement of 500 shares of Series A
preferred stock.
In February 1998, the Company exchanged approximately 1.65
million shares of common stock for all the outstanding shares of
Codon Pharmaceuticals, Inc., formerly known as OncorPharm, Inc.
("Codon") not held by the Company. The effect of this
transaction was to increase the Company's ownership of Codon to
100%. This transaction will be accounted for as a purchase. The
Company is in the process of valuing the consideration issued in
this transaction and allocating that value to the various assets
acquired. The Company, based on its preliminary analysis,
believes that a substantial portion of the purchase price will be
allocated to research and development projects in process and
expensed in the first quarter of 1998. As a result of this
transaction, Codon's operating expenses and losses will be
included in the operating results of the Company.
Results of Operations
Consolidated product sales decreased 15% to $12.9 million in
1997 compared to $15.3 million in 1996, which represented a 5%
decrease from $16.2 million in 1995. In 1997, the sales decrease
was attributable largely to the full-year effect of the
discontinuation of certain product lines in the U.S. in 1996
(-16%) and a decrease in the exchange rate of the French franc
(-6%), partially offset by an increase in sales of continuing
products (+7%). After adjusting for the elimination of the sales
of discontinued products, sales of continuing products increased
14% from 1995 to 1996. The Company has begun commercialization
of INFORM(TM) HER-2/neu in 1998, but cannot predict the impact on
sales at this time.
The Company is actively pursuing the sale or other disposal
of its non-oncology genetic products and research products
business units. Each of these business units currently generates
sales and margins which are significant to the sales of the
Company. If either such sale is consummated, the reported sales
and margins of the Company thereafter would be materially and
adversely affected.
Contract and grant revenue decreased 40% to $0.4 million in
1997 compared to $0.7 million in 1996, which decreased 43% from
$1.2 million in 1995. The contract and grant revenue decreased
in 1997 and 1996 due to the completion of grants received from
the National Institutes of Health, one in the middle of 1994 and
the other early in 1995. Four new grants were received in 1997;
however, two of the grants will end in 1998 which will likely
cause grant revenues to decrease further.
Gross profit as a percentage of sales decreased to 34% in
1997 from 37% in 1996, which represented a decrease from 49% in
1995. The decrease in 1997 was due to product mix changes and
competitive pressures on European margins, and to costs incurred
in the United States for validating, regulating, and scaling up
the initial stages of the manufacture of a recently FDA-approved
controlled diagnostic product, INFORM(TM) HER-2/neu. The Company
cannot estimate the future effects on cost of sales and margins
of the conversion to manufacturing products in conformity with
Good Manufacturing Practices as promulgated by the U.S. Food and
Drug Administration. 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 in an effort to lower inventory levels.
The product discontinuation costs in 1996 of $2.1 million
comprise the revaluation of inventory of discontinued products,
charge-off of goodwill associated with such products, and
severance payments to employees terminated in conjunction with
the Company's discontinuation plan. There were no product
discontinuation costs in 1997 or 1995.
Amortization of intangible assets in 1997, 1996, and 1995 is
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 slight decline in the amortization over the
periods presented was due to the change in exchange rates and the
completed research projects being fully amortized during 1996.
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 decreased 2% to
$14.8 million in 1997, compared to $15.1 million in 1996, which
represented a 10% increase from $13.8 million in 1995. The
decrease in 1997 was due to a reduction in legal expenses
associated with certain intellectual property matters, the change
in exchange rates, and the full year beneficial effects of the
discontinuation plan instituted in the second quarter of 1996 in
the U.S. These decreases were partially offset by legal and
other expenses associated with certain proposed strategic
transactions and with a lawsuit brought by a former employee.
The increase in 1996 was due to the above mentioned expenses
associated with certain intellectual property matters more than
offsetting the beneficial effects of cost reduction programs and
deconsolidation of the operating results of Codon in 1996. The
legal expenses associated with certain intellectual property
issues may increase in 1998 to or beyond levels experienced in
previous years because the issues being litigated are scheduled
to come to trial in the second quarter of 1998. Selling expenses
for diagnostic products will likely increase in 1998 as the
Company introduces and promotes the sale of the Company's newly
approved diagnostic product, INFORM(TM) HER-2/neu. If the
Company is successful in divesting either or both of its
non-strategic business units, overall selling, general and
administrative expenses will likely decrease substantially.
Research and development expenses remained level at
approximately $7.3 million and $7.2 million for 1997 and 1996,
respectively, which represented a decrease of 11% from $8.2
million in 1995. In 1997, the beneficial effects of the
discontinuation plan instituted in the second quarter of 1996
were offset by an increase in research and development expenses
in Europe. The decrease in 1996 resulted primarily from the
deconsolidation of the operating results of Codon and project
cessations as a result of the discontinuation plan, partially
offset by the expenses associated with the initial payments, made
in common stock of the Company, for certain research and
development collaboration agreements. If the Company is
successful in divesting either or both of its non-strategic
business units, overall research and development expenses will
likely decrease substantially.
Clinical and regulatory expenses decreased 20% to $2.0
million in 1997, compared to $2.5 million in 1996, which
represented a 13% increase from $2.3 million in 1995. The
decrease in 1997 is primarily due to lower costs for
manufacturing validation and regulation costs related to the
application for FDA approval of its newly approved diagnostic
tests partially offset by increased staff hired to support the
Company's efforts with respect to the support of its diagnostics
products. The increase in 1996 is attributable to the
substantial regulatory efforts associated with the applications
for FDA approval of certain diagnostic tests. Clinical and
regulatory expenses may increase in 1998 as the Company seeks
FDA approval for improved technology and additional claims both
associated with its newly approved diagnostic test. If the
Company is successful in divesting either or both of its
non-strategic business units, overall clinical and regulatory
expenses may likely decrease substantially.
As a result of the factors discussed above, net operating
loss decreased 7% to $20.4 million in 1997 compared to $22.0
million in 1996, which represented an increase of 34% from $16.4
million in 1995.
Investment income remained unchanged at $0.5 million for
both 1997 and 1996, which represented a 50% decrease from $1.0
million in 1995. The level of investment income is directly
related to the level of investment funds which increased in late
1995 and late 1996 with the private placements, in each case
partially depleted thereafter by subsequent cash operating losses
of the Company.
Interest and other expenses of $6.8 million, $3.1 million,
and $0.5 million in 1997, 1996, and 1995, respectively,
represented primarily interest expense which has become
substantially more significant through (i) the issuance of
options in conjunction with a line of credit, which bears
interest at the prime rate plus 2%; (ii) the amortization of the
beneficial conversion feature in the issuance of convertible
debentures in 1996 and 1995; and (iii) cash interest expense.
The following table sets forth the most significant elements of
interest and other expenses:
1997 1996 1995
---- ---- ----
(Dollars in Millions)
(i) Valuation of options $1.8 $ - $ -
(ii) Issuance of debentures 4.3 3.0 -
(iii) Cash interest expense
and other 0.7 0.1 0.5
Total $6.8 $3.1 $0.5
In 1997 and 1996, the interest and other expenses included
non-cash charges of $6.1 million and $3.0 million, respectively.
Equity in net loss of affiliates was $4.3 million in 1997 as
compared to $4.4 million and $2.4 million in 1996 and 1995,
respectively. The Company's proportionate share of net losses
attributable to Codon in 1997 decreased compared to 1996 due to a
decrease in the Company's ownership interest in Codon. In 1995,
Codon losses were included in operating results which caused the
1996 amount to increase accordingly. 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. As described in "General" above, Oncor re-acquired
100% of the stock of Codon in the first quarter of 1998, and as a
result all of Codon's losses will be included in the Company's
operating losses for the foreseeable future.
As a result of the factors discussed above, net loss
increased 7% to $30.9 million in 1997 compared to $29.0 million
in 1996, which represented an increase of 59% from
$18.2 million in 1995.
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 $4.9 million and $5.0 million at February 28, 1998
and December 31, 1997, respectively, compared to $18.9 million at
December 31, 1996. Approximately $2.0 million and $2.4 million
of the cash and liquid investments at February 28, 1998 and
December 31, 1997, respectively, are 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 filing.
In January 1998, the Company completed a $5 million equity
financing in a private placement of 500 shares of Series A
preferred stock, which are convertible into Common Stock.
The following table sets forth the most significant elements
of the cash flows of the Company in 1997 (in millions of
dollars):
Cash and liquid investments at January 1, 1997 $18.9
Net cash used in operating activities (15.6)
Proceeds from issuance of debentures 2.0
Effects of foreign exchange rate adjustments (0.9)
Loans to unconsolidated affiliate (1.7)
Proceeds from borrowings against a line of credit
due in October 1998 3.0
Purchases of equipment (0.8)
Exercise of stock options and other 0.1
------
Cash and liquid investments at December 31, 1997 $5.0
======
The net cash loss from operations is the result of the
losses of the Company discussed in "Results of Operations" above
in this management's discussion and analysis.
The proceeds of $2.0 million from the issuance of debentures
were from a private placement completed in January of 1997. The
effects of foreign exchange rate reflects the 14% decrease in the
French franc compared to the U.S. dollar. The loans to the
unconsolidated affiliate represents funds advanced to Codon to
finance the operations of this affiliate. The Company expects
such advances to continue at a rate of $0.6 million per quarter
until such time, if ever, as Codon secures funding from third
parties sufficient to support its operating needs. The proceeds
from the line of credit were secured from a bank line of credit
expiring October 31,1998.
Purchases of equipment are for the ongoing replacement of
office and laboratory equipment; the Company expects such
purchases to increase as larger scale facilities are prepared for
the anticipated manufacture of certain products, including
INFORM(TM) HER-2/neu. 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 1998 of $1.1
million. The Company has committed to expend $0.8 million in
support of various research agreements in 1998.
The Company has available for use in operations in North
America, where most of its cash losses occur, approximately $2.7
million at February 1998. An additional $0.2 million of the cash
in North America is not included in available cash above because
it is currently restricted and may not become available to fund
the operations of the Company in the near future.
The Company expects that its current liquid resources will
not be sufficient to fund operations after the end of April 1998.
Funds, if any, raised from most of the possible sources during
the intervening period must first be utilized to repay the
Company's bank debt of $3.0 million in accordance with the terms
of the underlying line of credit and related guarantees.
The Company is considering alternative forms of financing,
including among other things, equity or debt financing, sale of
significant assets which may result from the previously announced
retention of Lehman Brothers by the Company to explore strategic
alternatives to increase stockholder value, including sale of the
Company, sale of publicly-traded OncorMed common stock, third
party funding of Codon for future cash requirements and recovery
of Oncor advances to Codon and other alternatives.
At March 25, 1998, two of the alternative forms of financing
were in a more advanced stage of discussions, but no final
agreements in principle or definitive agreements had been
reached. First, the Company has received a non-binding term
sheet from a prospective purchaser for a small division of the
Company. Second, the Company has received a non-binding term
sheet which, if certain conditions are met, would permit the
Company to exercise, prior to its currently scheduled July 1998
exercise date, its put option in connection with the January 1998
private placement of convertible preferred stock, and sell up to
$7.5 million of additional convertible preferred stock. Among
other numerous conditions, one such alternative would require a
waiver from the guarantors of the $3.0 million line of credit.
There can be no assurance that either of the two
alternatives discussed above, or any of the other such forms of
financing can be completed by the Company in sufficient amounts
in timely fashion on acceptable terms, or at all, which would
have a material adverse effect on the Company. Even if
completed, each of such financing alternatives may have certain
terms, conditions or ramifications which may have a material
adverse effect on the Company's business, financial condition and
results of operations. For instance, any such equity financings
likely will be dilutive to stock holders, the terms of any debt
financing, as does the existing line of credit, may require
substantially all of the assets of the Company to be pledged as
collateral, may involve warrant or equity dilution and/or may
contain restrictive covenants which limit the Company's ability
to pursue certain courses of action, and the sale of assets will
decrease the revenue base of the Company.
While the Company is using its best efforts to consummate
one or more of these potential sources of funding, it is possible
that the success, if any, of these efforts will not be sufficient
to fund the Company for the foreseeable future at its present
level of operations. In the event that the Company is unable to
raise additional capital by the end of April 1998, the Company
may promptly cease significant portions of its programs, projects
and business operations. If the pursuit of these potential
funding sources proves largely unsuccessful, the Company may be
forced into the complete termination of its business operations.
The Company holds 2.0 million shares of common stock in
OncorMed, Inc., a publicly traded affiliate of the Company, whose
shares have traded in the past three months in the range of
$5.375 to $7.50 per share. The Company is restricted from
selling 0.9 million such shares in the public markets due to
outstanding options it has issued pursuant to which the Company
has offered to sell the shares to the option holders for $4.75 to
$6.00 per share. While exercise of such options would generate
cash of approximately $4.7 million, such exercise is outside the
control of the Company. The remaining 1.1 million shares of
common stock of OncorMed can be sold in the public markets only
pursuant to restrictions imposed by the SEC such that the
complete liquidation of this position in the public markets
likely would take a year or more. Trading activity in OncorMed
stock is limited, which would further restrict the Company's
ability to liquidate a significant portion of its position. The
Company is also considering attempting to secure a purchaser for
a block of the stock in a private transaction.
Cash Position in Europe
In the absence of any unforeseen downside of exceptional
nature, the Company believes that its current cash position in
Europe is at least sufficient to fund the European operation
through the end of the year.
Effort to Obtain Strategic Transaction
In June 1997, the Company engaged Lehman Brothers to assist
in securing strategic alliances, including the possible sale of
the Company, which would, among other effects, alleviate the
Company's cash requirements. There can be no assurance that any
such transaction will be concluded.
Year 2000 Compliance
Many currently installed computer systems and software
products are coded to accept only two digit entries in the date
code field. Beginning in the year 2000, these date code files
will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. While uncertainty exists
concerning the potential effects associated with such compliance,
the Company does not believe that year 2000 compliance will
result in a material adverse effect on its financial condition or
results of operations.
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, 1996 and 1997 . . . . . . . . . . . . F-2
Consolidated Statements of Operations
for the years ended December 31, 1995,
1996 and 1997. . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Changes in
Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997 . . . . . . F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1995,
1996 and 1997. . . . . . . . . . . . . . . . . . . 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, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform 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.
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, 1996 and 1997,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 1 to the financial statements, the Company has incurred
significant losses and will require additional financing to
continue operations. These factors raise substantial doubt about
its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 20, 1998
(except with respect to the financial
condition of the Company described in
Note 1, as to which the date is
March 26, 1998, and to the Vysis matter
described in Note 8, as to which the
date is March 20, 1998)
ONCOR, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
---------------------------
1996 1997
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $13,058,657 $2,873,765
Short-term investments, at market 388,504 110,547
Restricted cash 5,432,478 2,012,611
Accounts receivable, net of allowance
for doubtful accounts of approxi-
mately $372,000 and $419,000 2,401,639 2,028,239
Receivable from Officer/Director 294,039 296,874
Inventories 3,839,630 3,161,141
Receivable from affiliates 233,007 50,439
Other current assets 630,053 3,036,676
------------ ------------
Total current assets 26,278,007 13,570,292
------------ ------------
NON-CURRENT ASSETS:
Property and equipment, net 5,044,270 4,175,768
Deposits and other non-current assets 216,035 397,801
Investment in and advances to affiliates 3,213,548 856,064
Intangible assets, net 6,918,278 4,884,234
------------ ------------
Total non-current assets 15,392,131 10,313,867
------------ ------------
Total assets $41,670,138 $23,884,159
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,523,585 $3,141,845
Accrued expenses and other current
liabilities 1,656,900 1,697,744
Notes payable - 3,013,131
Affiliate stock issuable under warrants - 3,787,500
Current portion of long-term debt 719,337 551,242
------------ -------------
Total current liabilities 4,899,822 12,191,462
------------ -------------
NON-CURRENT LIABILITIES:
Long-term debt 10,386,110 5,867,079
Deferred rent - 259,351
------------ -------------
Total non-current liabilities 10,386,110 6,126,430
------------ -------------
Total liabilities 15,285,932 18,317,892
------------ -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 3,040,119 2,378,157
------------ -------------
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,
24,214,349 and 27,302,384 issued;
24,134,940 and 27,222,975 outstanding 242,143 273,024
Common stock warrants outstanding 781,250 909,630
Additional paid-in capital 125,327,438 137,873,399
Deferred compensation (641,270) (879,020)
Unrealized gain on investments (94) -
Cumulative translation adjustment (508,172) (2,184,342)
Accumulated deficit (101,636,696) (132,584,069)
Less - 79,409 shares of common
stock held in treasury, at cost (220,512) (220,512)
------------ -------------
Total stockholders' equity 23,344,087 3,188,110
------------ -------------
Total liabilities and
stockholders' equity $41,670,138 $23,884,159
============ =============
The accompanying notes are an integral part
of these consolidated financial statements.
ONCOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------------
1995 1996 1997
---- ---- ----
GROSS REVENUES:
Product sales $16,192,836 $15,323,167 $12,948,983
Contract and grants 1,194,646 682,529 408,589
---------------------------------------------
Gross revenues 17,387,482 16,005,696 13,357,572
---------------------------------------------
OPERATING EXPENSES:
Direct cost of sales 8,279,445 9,656,332 8,515,380
Repositioning expense - 2,075,000 -
Amortization of
intangible assets 1,339,023 1,322,838 1,157,520
Selling, general and
administrative 13,751,342 15,073,138 14,824,585
Research and development 8,169,625 7,275,565 7,186,150
Clinical and regulatory 2,252,505 2,545,791 2,045,828
---------------------------------------------
Total operating expenses 33,791,940 37,948,664 33,729,463
---------------------------------------------
LOSS FROM OPERATIONS (16,404,458) (21,942,968) (20,371,891)
---------------------------------------------
OTHER INCOME (EXPENSE):
Investment income 1,032,584 519,153 522,793
Interest and other
expenses, net (501,410) (3,125,344) (6,846,804)
Equity in net loss of
affiliates and
minority interest (2,356,453) (4,431,015) (4,251,471)
---------------------------------------------
Net other expense (1,825,279) (7,037,206) (10,575,482)
---------------------------------------------
Net loss ($18,229,737) ($28,980,174) ($30,947,373)
=============================================
BASIC AND DILUTED
NET LOSS PER SHARE ($0.87) ($1.26) ($1.21)
=============================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 20,887,873 23,030,793 25,546,557
=============================================
The accompanying notes are an integral part
of these consolidated financial statements.
/TABLE
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1995, 1996, and 1997
(Part I)
Common Unrealized
Common Stock Stock (Loss)
---------------------- Warrants Gain On
Shares Amount Outstanding Investments
-----------------------------------------------------------
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 subsidiaries - - - -
and unconsolidated
affiliates
Issuance of common
stock and warrants
in connection with
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 and amortization
of non-employee stock
options - - - -
Cumulative translation
adjustment - - - -
Net unrealized holding
gain on investments - - - (650)
Net loss - - - -
-----------------------------------------------------------
BALANCE,
December 31, 1996 24,214,349 242,143 781,250 (94)
Sales of common stock 155,972 1,560 - -
Sales of common
stock of unconsolidated
affiliate - - - -
Issuance of common
stock and warrants
in connection with
debt 2,888,088 28,881 128,380 -
Exercise of stock
options 43,975 440 - -
Issuance and amortization
of non-employee stock
and options - - - -
Cumulative translation
adjustment - - - -
Net unrealized holding
gain on investments - - - 94
Net loss - - - -
-----------------------------------------------------------
December 31, 1997 27,302,384 $273,024 $909,630 -
===========================================================
The accompanying notes are an integral part
of these consolidated financial statements.
/TABLE
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1995, 1996, and 1997
(Part II)
Cumulative Additional
Deferred Translation Paid-In
Compensation Adjustment Capital
--------------------------------------------------
BALANCE,
December 31, 1994 - ($13,224) $94,734,791
Sales of common
stock - - 2,801,800
Exercise of unit
purchase options - - 172,433
Exercise of stock
options and
warrants - - 524,588
Net unrealized
holding gain on
investments - - -
Cumulative translation
adjustment - 426,011 -
Net loss - - -
------------------------------------------------
BALANCE,
December 31, 1995 - 412,787 98,233,612
Sales of common
stock of subsidiaries
and unconsolidated
affiliates - - 12,428,145
Issuance of common
stock and warrants
in connection with
debt - - 12,802,185
Exercise of stock
options - - 666,940
Issuance of common
stock in connection
with research and
development agreements - - 460,619
Issuance and amortization
of non-employee stock
options (641,270) - 735,937
Cumulative translation
adjustment - (920,959) -
Net unrealized holding
gain on investments - - -
Net loss - - -
-----------------------------------------------
BALANCE,
December 31, 1996 (641,270) (508,172) 125,327,438
Sales of common stock
and warrants - - 624,520
Sales of common
stock of unconsolidated
affiliates - - 437,525
Issuance of common
stock and warrants
in connection with
debt - - 10,288,639
Exercise of stock
options - - 91,529
Issuance and amortization
of non-employee stock
and options (237,750) - 1,103,748
Cumulative translation
adjustment - (1,676,170) -
Net unrealized holding
gain on investments - - -
Net loss - - -
------------------------------------------------
BALANCE,
December 31, 1997 ($879,020) ($2,184,342) $137,873,399
================================================
The accompanying notes are an integral part
of these consolidated financial statements.
/TABLE
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1995, 1996, and 1997
(Part III)
Treasury Stock
Accumulated ------------------
Shares Amount Total
--------------------------------------------------
BALANCE,
December 31, 1994 ($54,426,785) 79,409 ($220,512) $40,278,961
Sales of common
stock - - - 2,809,484
Exercise of unit
purchase options - - - 173,616
Exercise of stock
options and
warrants - - - 526,513
Net unrealized
holding gain on
investments - - - 2,504
Cumulative translation
adjustment - - - 426,011
Net loss (18,229,737) - - (18,229,737)
-------------------------------------------------
BALANCE,
December 31, 1995 (72,656,522) 79,409 (220,512) 25,987,352
Sales of common
stock of subsidiaries
and unconsolidated
affiliates - - - 12,428,145
Issuance of common
stock and warrants
in connection with
debt . - - - 13,605,067
Exercise of stock
options - - - 668,535
Issuance of common
stock in connection
with research and
development agreements - - - 462,104
Issuance and amortization
of non-employee stock
options - - - 94,667
Cumulative translation
adjustment - - - (920,959)
Net unrealized holding
gain on investments - - - (650)
Net loss (28,980,174) - - (28,980,174)
------------------------------------------------
BALANCE,
December 31, 1996 (101,636,696) 79,409 (220,512) 23,344,087
Sales of common stock
and warrants - - - 626,080
Sales of common
stock of unconsolidated
affiliates - - - 437,525
Issuance of common
stock and warrants
in connection with
debt - - - 10,445,900
Exercise of stock
options - - - 91,969
Issuance and amortization
of non-employee stock
and options - - - 865,998
Cumulative translation
adjustment - - - (1,676,170)
Net unrealized holding
gain on investments - - - 94
Net loss (30,947,373) - - (30,947,373)
--------------------------------------------------
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------
1995 1996 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($18,229,737) ($28,980,174) ($30,947,373)
Adjustments to reconcile net loss to
net cash used in operating activities:
Issuance of common stock for interest
and imputed interest on convertible
notes - 2,755,235 3,177,072
Issuance of common stock warrants in
stock of an affiliate as payment
for interest - - 1,825,962
Depreciation and amortization 3,028,523 2,858,336 2,928,200
Gain on disposal of assets - (269,978) -
Non-cash product discontinuation - 1,719,473 -
Issuance of common stock in
connection with research and
development agreements and
expenses for non-employee
stock options - 556,771 865,998
Equity in net loss of affiliate
and minority interest 2,409,027 4,431,005 4,251,471
Changes in operating assets
and liabilities:
Accounts receivable (172,618) 1,434,837 227,605
Inventories (847,473) 1,468,239 348,752
Other current assets (593,076) 269,912 (649,923)
Deposits and other non-current
assets 25,176 1,776 85,331
Accounts payable 705,260 (937,002) 332,048
Accrued expenses and other
current liabilities (59,360) (134,451) 1,684,984
Deferred rent (72,858) (18,223) 259,351
Net cash used in operating -------------------------------------------
activities (13,807,136) (14,844,244) (15,610,522)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,127,285) (630,594) (743,844)
Disposals of property and equipment - 393,194 -
Acquisitions of businesses (Note 3) (194,420) - -
Currency protection in Appligene
agreement - (44,423) -
Purchase of stock in affiliate - (300,000) -
Redemptions of investments 11,973,499 671,733 278,051
Net cash provided by (used -------------------------------------------
in) investing activities 8,651,794 89,910 (465,793)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 2,809,484 - 626,080
Proceeds from sales of stock of
subsidiary 3,034,503 9,099,364 -
Offering costs of private placement - (54,100) -
Exercise of stock options 700,129 668,535 91,969
Change in restricted funds - (5,432,478) 3,394,895
Loan to unconsolidated affiliate - - (1,709,321)
Payment on notes for acquisitions (2,990,507) (1,764,636) -
Payment on bank loans (1,169,381) (884,919) (684,725)
Proceeds from line of credit - - 3,000,000
Proceeds from issuance of convertible
debt and warrants 7,366,482 13,207,410 2,052,226
Net cash provided by financing -------------------------------------------
activities 9,750,710 14,839,176 6,771,124
-------------------------------------------
EFFECT OF CHANGE IN EXCHANGE RATE -------------------------------------------
ON CASH (95,354) (485,080) (879,701)
-------------------------------------------
Net increase (decrease) in cash and
cash equivalents 4,500,014 (400,238) (10,184,892)
CASH AND CASH EQUIVALENTS, beginning of
the period 9,749,911 13,458,895 13,058,657
-------------------------------------------
CASH AND CASH EQUIVALENTS, end of the
period $14,249,925 $13,058,657 $2,873,765
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
interest $389,842 $251,892 $144,276
The accompanying notes are an integral part
of these consolidated financial statements.
ONCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
(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. 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. Changes in the Company's proportionate share of
subsidiaries or affiliate's equity resulting from common stock
issuances of subsidiaries and investments in affiliates are
credited to equity.
Significant Risks and Uncertainties
The following factors may affect the Company's ability to
continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
The Company has incurred significant cash losses throughout
its existence and has no immediate expectation to achieve cash
positive operations. Through December 31, 1997, the Company has
incurred cumulative losses totaling approximately $133 million.
The Company's current cash resources are nearly depleted and any
cash infusions would likely be required to be utilized first to
repay bank debt obligations of $3.0 million.
The Company has available for use in operations in North
America, where most of its cash losses occur, approximately $0.6
million dollars of unrestricted cash at December 31, 1997.
Approximately $1.0 million of the cash in North America is not
included in this amount because it was restricted as of December
31, 1997. The remaining balance relates primarily to funds
restricted to litigation with a former employee (see Note 8). In
February 1998, the Company obtained a release of approximately
$0.8 million of these funds which had been restricted. During
the first quarter of 1998, the Company completed a $5 million
equity financing in a private placement of preferred stock. As
of February 1998, the Company has available for use in North
America approximately $2.7 million.
Operations of the Company continue to be subject to certain
risks and uncertainties including, among others, uncertainties
relating to 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 that future
operations will show any significant improvement over past
results.
The Company is considering alternative forms of financing,
including among other things, equity or debt financing, sale of
significant assets which may result from the previously announced
retention of Lehman Brothers by the Company to explore strategic
alternatives to increase stockholder value, including sale of the
Company, sale of publicly-traded OncorMed common stock, third
party funding of Codon for future cash requirements and recovery
of Oncor advances to Codon and other alternatives.
While the Company is using its best efforts to consummate
one or more of these potential sources of funding, it is possible
that the success, if any, of these efforts will not be sufficient
to fund the Company for the foreseeable future at its present
level of operations. In the event that the Company is unable to
raise additional capital by the end of April 1998, the Company
may promptly cease significant portions of its programs, projects
and business operations. If the pursuit of these potential
funding sources proves largely unsuccessful, the Company may be
forced into the complete termination of its business operations.
The Company holds 2.0 million shares of common stock in
OncorMed, Inc., a publicly traded affiliate of the Company, whose
shares have traded in the past three months in the range of
$5.375 to $7.50 per share. The Company is restricted from
selling 0.9 million such shares in the public markets due to
outstanding options it has issued pursuant to which the Company
has offered to sell the shares to the option holders for $4.75 to
$6.00 per share. While exercise of such options would generate
cash of approximately $4.7 million, such exercise is outside the
control of the Company. The remaining 1.1 million shares of
common stock of OncorMed can be sold in the public markets only
pursuant to restrictions imposed by the SEC such that the
complete liquidation of this position in the public markets
likely would take a year or more. Trading activity in OncorMed
stock is limited, which would further restrict the Company's
ability to liquidate a significant portion of its position. The
Company is also considering attempting to secure a purchaser for
a block of the stock in a private transaction.
Concentrations of Credit Risk
The Company and its customers are directly affected by the
well being of the health care industry world-wide.
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 will not 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. Affiliate stock issued
under warrants is recorded at fair value based upon a valuation
model. It was not practicable to estimate the fair value of the
Company's long-term debt because quoted market prices do not
exist and no rates are currently available to the Company for
loans with similar terms or maturities.
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 that future undiscounted net cash
flows will be less than the carrying amount of the assets.
Impairment is measured as the difference between carrying cost
and fair market value.
Cash Equivalents and Investments
Cash equivalents and investments at December 31, 1996 and
1997, consist primarily of funds invested in money market
instruments and commercial paper. 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.
Approximately $1.0 million in restricted cash was pledged as
collateral for a loan of an officer and director until February
1998 at which time it was reduced to approximately $0.2 million.
Cash of approximately another $1.0 million is held in escrow
pursuant to a lawsuit brought by a former employee in France.
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.
Revenue Recognition
The Company generally recognizes revenue from 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 9) 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 rates in effect on the respective balance sheet dates.
Revenues and expenses have been translated using the average
exchange rate during the periods presented. Cumulative
translation losses of $0.5 million and $2.2 million at
December 31, 1996 and 1997, 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 files separate income tax
returns in France for its French subsidiaries.
The Company accounts for its income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes."
With respect to U.S. federal income tax, as of December 31,
1997 the Company has net operating loss carry-forwards ("NOLs")
of approximately $100.7 million available to offset future
taxable income. The Company also has research and development
tax credits of approximately $1.6 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. The French company had accumulated capital
loss and tax loss carryforwards of approximately 9.8 million and
43.7 million French francs, respectively, at December 31, 1997.
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,
1997, the Company's net deferred tax assets in the United States
and France, the only material element of which is net operating
loss carryforwards, were approximately $41.9 million and $2.0
million, respectively, at December 31, 1997 and $34.2 million and
$1.6 million at December 31, 1996, 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
recent 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.
Basic and Diluted Net Loss Per Share
In March 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 is effective for
financial statements issued after December 15, 1997. The Company
has implemented SFAS No. 128. SFAS No. 128 requires the dual
presentation of basic and diluted net loss per share. Basic net
loss per share includes no dilution and is computed by dividing
net loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted loss
per share includes the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock. Options, warrants and
convertible securities that were outstanding at the end of each
period presented were not included in the computation of diluted
net loss per share as their effect would be antidilutive. As a
result the basic and diluted loss per share amounts are
identical.
(3) MERGERS AND ACQUISITIONS
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 transaction was accounted for as a
purchase and 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.
(4) REPOSITIONING EXPENSE
In 1996, the Company adopted a repositioning plan to
discontinue the development, manufacture, sale and support of
certain imaging, research, and non-oncology genetics products.
Recorded repositioning costs of $2.1 million comprise the
charge-off of discontinued products, charge-off of goodwill
associated with a related business unit, and severance payments
to former employees whose employment was terminated in conjunction
with the plan.
(5) TRANSACTIONS INVOLVING SUBSIDIARY AND 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, and reduce the minimum payment rates to $25,000 per
quarter beginning in the second quarter of 1998.
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, 1996 and 1997.
Also included in this balance at December 31, 1996 and 1997,
is a balance of $109,854 and $50,439, respectively, which is 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 has since accounted for its
investment in OncorMed using the equity method of accounting. 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 in the Company's proportionate share of OncorMed's
equity which was recorded as an increase to the Company's
investment in OncorMed and in its paid-in-capital. In February
1997, Incyte Pharmaceuticals, Inc. granted OncorMed a non-exclusive
license. In consideration for the grant of the license
and $3.0 million cash, OncorMed issued 773,588 shares of common
stock and a warrant to purchase up to ten percent of OncorMed's
outstanding stock at the date of the warrant's exercise. The
effect of this transaction was to reduce the Company's ownership
interest in OncorMed to approximately 25% and an increase the
Company's proportionate share of OncorMed's equity which was
recorded as an increase to the Company's investment in OncorMed
and its paid-in capital.
Summarized financial information of OncorMed is as follows:
1995 1996 1997
---- ---- ----
Condensed Statement of
Income
Net Sales $311,387 $627,390 $959,645
Operating Loss (6,686,134) (7,915,717) (10,974,088)
Net Loss $(6,510,547) $(7,455,973) $(10,746,329)
Condensed Balance Sheet
Current Assets $931,122 $7,934,124 $2,052,363
Non-current Assets 1,520,752 1,179,851 1,124,252
Current liabilities 1,331,806 1,444,762 1,775,458
Non-current liabilities 726,261 719,334 724,347
Shareholders' equity $393,807 $6,949,879 $676,810
The current market value of the Company's investment in
OncorMed is approximately $11.8 million.
The Company currently holds 2.0 million shares of common
stock in OncorMed. The Company is restricted from selling 0.9
million such shares in the public markets due to outstanding
warrants it has issued pursuant to which the Company has offered
to sell the shares to the warrant holders for $4.75 to $6.00 per
share (see Note 11). While exercise of such warrants would
generate cash of approximately $4.7 million, such exercise is
outside the control of the Company. The remaining 1.1 million
shares of common stock of OncorMed can be sold in the public
markets only pursuant to restrictions imposed by the SEC such
that the complete liquidation of this position in the public
markets likely would take a year or more. Trading activity in
OncorMed stock is limited, which would further restrict the
Company's ability to liquidate a significant portion of its
position.
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 and certain
other technologies. The Chief Executive Officer of the Company
is the Chairman of the Board of Directors of Codon. The Company
contributed $1.0 million in exchange for 2,000,000 shares of
Codon common stock. During the remainder of 1994, the Company
advanced funds aggregating approximately $0.6 million to Codon to
augment its working capital. Codon performed research services
for the Company which reduced its obligations pursuant to the
advances. In December 1994, the balance of the advances was
converted into a note which was 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. The effect of these transactions was to reduce the
Company's ownership interest in Codon to approximately 42%. As
the Company's voting interest was less than 50%, the Company has
since accounted for its investment in Codon using the equity
method of accounting. The financial statements of the Company
for the year ended December 31, 1996 have been retroactively
adjusted to record the results of Codon pursuant to the equity
method of accounting from January 1, 1996. The restatement had
no impact on the Company's consolidated net loss or net loss per
share. Included in receivable from affiliates at December 31,
1996 is approximately $123,000 due from Codon.
In February 1998, the Company exchanged approximately 1.65
million shares of common stock for all the outstanding shares of
Codon not held by the Company. The effect of this transaction
was to increase the Company's ownership of Codon to 100%. This
transaction will be accounted for as a purchase. The Company is
in the process of valuing the consideration issued in this
transaction and allocating that value to the various assets
acquired. The Company, based on its preliminary analysis,
believes that a substantial portion of all of the purchase price
will be allocated to research and development projects in process
and expensed in the first quarter of 1998.
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.
Summarized financial information of Codon for the period of
equity accounting is as follows:
1996 1997
---- ----
(unaudited) (unaudited)
Condensed Statement of Income
Net Sales $ -0- $ -0-
Operating Loss (4,033,733) (3,433,610)
Net Loss $(4,222,904) $(3,354,285)
Condensed Balance Sheet
Current Assets $ 448,255 $ 50,268
Non-current Assets 1,434,677 1,180,393
Current liabilities 392,604 1,557,803
Non-current liabilities 123,037 1,652,424
Shareholders' equity $ 1,367,291 $(1,979,566)
Appligene Oncor S.A.
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 $8.6
million. As a result of this transaction, the Company's equity
interest in Appligene was reduced to approximately 80%.
(6) RESEARCH, DEVELOPMENT AND LICENSING AGREEMENTS
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 Company paid $0.4 million in 1995, $0.5
million in 1996, and $0.5 million in 1997 under the agreement
which expires in December 1998.
(7) STOCKHOLDERS' EQUITY
Subsequent Event for Issuance of Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of
Preferred Stock (par value of $.01 per share). The rights of any
Preferred Stock ultimately issued will be determined by the Board
of Directors upon issuance. In January 1998, the Company
completed a $5 million equity financing in a private placement of
500 shares of Series A preferred stock. The preferred stock is
convertible into common stock of the Company under certain
circumstances, generally in a period beginning after 90 days, at
prices equal to the lower of (i) 100% (reducing over time to 90%)
of the average of the lowest closing bid price of the common
stock on any two of the most recent 22 trading days preceding the
date of conversion and (ii) $4.56. In addition, the Company
issued warrants to purchase 125,000 shares of common stock in
connection with the transaction, with an exercise price of $5.16
per share. The investors and the Company each have rights to
increase the amount of the investment under certain
circumstances.
Common Stock, Convertible Notes 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 250,000 shares of the Company's Common Stock. The
Company received total proceeds of approximately $10.0 million of
which $0.4 million was allocated to the warrants. 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 the lesser of $5.00 per
share or 80.0% of the market value of the Common Stock at the
time of conversion over a period of approximately five months.
As of December 31, 1997, the balance of convertible notes
outstanding was approximately $4.7 million.
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 $0.4
million was allocated to the warrants. Issuance costs were not
significant. As of December 31, 1997, all of these notes had
been converted.
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 $7.0 million. Total proceeds, net of
issuance costs were approximately $9.3 million. As of December
31, 1996, all these notes had been converted.
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 with a fixed
conversion benefit. This imputed interest is accreted from the
date of issuance through the expected period for which the rights
are earned. The interest expense recorded in 1996 and 1997
pursuant to this accounting convention is approximately $2.6
million and $3.0 million, respectively.
In January and September of 1996 and in February of 1997 and
February of 1998, the Company filed registration statements on
Form S-3 with the Securities and Exchange Commission covering the
sale of up to 4,455,510, 4,631,495, 4,907,645 and 5,587,965
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
warrants 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.
On May 23, 1997, the Board of Directors authorized a regrant
program (the "1997 Regrant Program") which allowed active current
option holders, excluding executive officers, to forego earned
vesting and elect to exchange all or some of their outstanding
options, ranging in exercise price from $4.125 to $7.50 per
share, for new options under the Company's 1992 Stock Option
Plan, to purchase shares of the common stock at a new price of
$3.625, the closing price on May 23, 1997, the regrant date under
the 1997 Regrant Program. Options to purchase approximately
462,000 shares of common stock were canceled and regranted.
Stock options that were regranted began vesting over a four year
period measured from May 23, 1997.
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 "Statement"), the Company's net
income and earnings per share would have been reduced to the
following pro forma amounts:
1995 1996 1997
---- ---- ----
Net Loss: As Reported ($18,229,737) ($28,980,174) ($30,947,373)
Pro Forma ($18,664,502) ($30,544,795) ($32,813,548)
Net Loss
Per Share: As Reported ($0.87) ($1.26) ($1.21)
Pro Forma ($0.89) ($1.33) ($1.28)
Because the method of accounting promulgated by the Statement 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 on a pro forma basis 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, 1996 and 1997: risk-free
interest rates of 4 percent, 4 percent and 5 percent,
respectively; expected lives of 5.9 years for the options; and
expected volatility of 56 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, 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
Granted 1,108,400 3.9243 240,000 3.6600
Exercised (39,500) 1.8072 - -
Canceled (679,400) 5.2930 (50,000) 5.6250
----------- ---------- ---------- ----------
Balance, December 31, 1997 3,937,485 $4.5559 590,000 $2.9718
=========== ========== ========== ==========
Options exercisable at
December 31, 1997(1) 2,142,249 $4.8300
=========== ==========
Options not exercisable at
December 31, 1997(2) 1,795,236 $4.2288
=========== ==========
__________________
(1) Range of price for exercisable options: $1.0625 - $7.75
(2) Range of price for non-exercisable options: $3.3125 - $6.875
/TABLE
Summary of reserved shares
As of December 31, 1997, the Company has reserved the following
shares of Common Stock for future use as follows:
Unit purchase options. . . . . . . . . . . 118,346
1992 stock option plan . . . . . . . . . . 3,937,485
Special stock options. . . . . . . . . . . 590,000
Conversion of debentures issued
to debenture holders . . . . . . . . . . 3,140,688
Warrants issued in conjunction with
private placements . . . . . . . . . . . 530,836
---------
8,317,355
=========
In February 1998, the Company filed an S-3 to register
5,587,965 shares of common Stock for the private placement of
convertible preferred stock.
(8) COMMITMENTS AND CONTINGENCIES
The Company has royalty arrangements with certain
consultants and institutions that call for royalty payments based
upon a percentage of sales developed under the royalty
agreements. Royalty expense for the years ended December 31,
1995, 1996 and 1997 was approximately $0.2, $0.3 and $0.4,
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, 1997, are as
follows:
For the Year
Ending
December 31, Amount
------------- ------------
1998 . . . . . . $823,100
1999 . . . . . . 184,600
2000 . . . . . . 123,100
2001 . . . . . . 123,100
2002 . . . . . . 123,100
Thereafter . . . 122,100
-----------
TOTAL $1,499,100
===========
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, 1997 of $0.3 million. Rental expense for the years
ended December 31, 1995, 1996 and 1997 was approximately $0.7
million, $0.8 million and $0.9 million, respectively. Minimum
lease payments under these lease agreements, excluding operating
expense pass-throughs, as of December 31, 1997, are as follows:
For the Year
Ending
December 31, Amount
------------- ------------
1998 . . . . . . $1,051,994
1999 . . . . . . 1,079,738
2000 . . . . . . 1,112,129
2001 . . . . . . 1,145,494
2002 . . . . . . 1,179,858
Thereafter . . . 1,523,020
-----------
TOTAL $7,092,233
===========
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 had guaranteed a loan of an officer/director for
up to approximately $1.0 million. The loan is due upon demand
and collateralized by the Company's stock owned by the officer.
The guarantee is collateralized by cash deposits of the Company.
In February 1998, the officer/director repaid the loan in part
and the Company obtained a release of approximately $0.8 million
of funds which were issued to collateralize the Company's
guarantee of the loan.
The Company has made advances to or paid expenses on behalf
of the same officer/director in an amount outstanding at
December 31, 1997 of approximately $300,000. The officer
executed term notes on September 19, 1997, due September 30,
2000, in this amount. The notes bear interest at 6% per annum,
payable in monthly instalments of principal and interest of five
thousand dollars ($5,000), commencing October 1, 1997, each
successive payment to be made on the first day of each succeeding
month, thereafter, until September 30, 2000, when all remaining
unpaid principal and interest shall be paid in full. In March
1998, the Company, in exchange for certain covenants and
consideration, reduced the outstanding instalments by $75,000.
No other payments or reductions in the note balances have
occurred.
The University of California and its licensee, Vysis, Inc.
("Vysis"), filed suit against Oncor on September 5, 1995 in the
United States District Court for the Northern District of
California (the "Court"), alleging 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 which are present in the hybridization probe. The
Company filed motions for summary judgment of invalidity,
non-infringement and unenforceability of the patent claims in suit,
which were denied in August and December 1997. In August 1997,
the Court granted Vysis' motion for summary judgment on novelty
and non-obviousness with respect to the patent, and granted in
part and denied in part Vysis' motion for summary judgement that
the patent in suit is infringed. The Company also filed a motion
which would have permitted an immediate appeal to have been taken
on claim interpretation and invalidity issues, but was denied in
October 1997. On February 3, 1998, the Company notified the
Court that it intended to concede that the Company's probes, when
used with metaphase chromosomes infringed the Vysis patent. On
March 20, 1998, Vysis filed a motion requesting that the Court
(i) establish that use of the Company's INFORM(TM) product
infringes the patent in suit, or alternatively that the Company
be precluded from presenting evidence that such use would
infringe the patent in suit, (ii) permit Vysis to present to the
jury at trial evidence concerning the Company's alleged failure
to produce documents and false statements, and (iii) direct the
Company to pay to Vysis approximately $42,500. The Company
intends to oppose that motion. A trial date of April 20, 1998
has been set by the Court to litigate the remaining issues. The
Company and Vysis have entered into discussions, including
proposals and counterproposals, with the objective of settling
all claims prior to trial. 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 most of
the Company's probes and genetic test kits, either of which would
likely have a material and adverse effect on the Company's
business, financial condition or results of operations.
A former employee brought suit against the Company in France
for approximately $0.3 million and instituted arbitration
proceedings for $0.6 million, all related to the employee's
termination. The plaintiff has obtained a ruling that the
Company must retain in escrow an amount of funds equal to the
aggregate amount of the claims. Such amounts are shown on the
balance sheet as restricted cash. Management believes that the
outcome of these matters will not be material to the results of
operations or financial condition of the Company.
(9) SEGMENT 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.
Product sales relating to each geographic region are as
follows:
Years Ended December 31,
------------------------
1995 1996 1997
---- ---- ----
United States . . . . . $ 7,167,415 $ 6,644,041 $ 5,068,192
Europe. . . . . . . . . 7,707,198 7,018,994 6,298,610
Japan . . . . . . . . . 580,514 964,762 801,410
Other . . . . . . . . . 737,709 695,370 780,771
------------ ------------ ------------
$16,192,836 $15,323,167 $12,948,983
============ ============ ============
Revenues, largely in Europe, attributable to the Company's
operations in France for the years ended December 31, 1995, 1996
and 1997 were approximately $7.3 million, $7.1 million and $6.6
million, respectively, and net loss for the same periods were
$0.9 million, $2.8 million and $4.0 million, respectively. The
Company's identifiable assets in France at December 31, 1995,
1996 and 1997 were carried at approximately $9.2 million, $9.8
million and $5.1 million, respectively, largely comprising
goodwill.
In 1996, the pharmaceutical imaging business unit was sold
for aggregate proceeds of $0.4 million and a net gain of $0.3
million which is included in other income 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 has made no
discretionary contributions to date and has no plans to do so.
(11) LINE OF CREDIT
During 1997, the Company obtained a $3.0 million line of
credit which expires on October 31, 1998. Outstanding borrowings
at December 31, 1997, were $3.0 million. The line is guaranteed
by certain shareholders whose guarantees are secured by
substantially all of the assets of the Company. The line bears
interest at a rate equal to the prime rate, as reported in the
Wall Street Journal, plus 2.0%, which is payable quarterly
through July 31, 1998. The Company issued options to purchase
900,000 shares of OncorMed, Inc. ("OncorMed," a 25% owned
affiliate), held by the Company in conjunction with establishing
and extending this line of credit. The Company has valued the
options at approximately $3.8 million which is reflected as a
liability on the balance sheet. Approximately $1.8 million of
the value of the options was recorded as a charge to interest and
other non-operating expense in 1997. The remaining deferred
financing fees are included in other current assets and will be
charged to interest expense in future periods over the term of
the line of credit.
(12) LONG-TERM DEBT
Long-term debt at December 31 consists of the following
obligations:
1996 1997
---- ----
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 2001. $8,851,589 $4,658,959
Obligation under capital lease bearing
interest at 5.62% (collateralized by
building) with final maturity in 2010. 1,075,070 865,953
Various other notes payable to a French
government funding agency and to banks,
primarily secured by the assets of a
subsidiary. 1,178,788 893,409
------------ ------------
Total long-term debt 11,105,447 6,418,321
Less current maturities 719,337 551,242
------------ ------------
Non-current portion $10,386,110 $5,867,079
============ ============
The conversion price of the convertible notes payable at
December 31, 1997 is 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 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,
1997, are as follows:
1998 $ 551,242
1999 380,137
2000 202,050
2001 4,843,703
2002 194,606
Thereafter 246,583
-----------
TOTAL $6,418,321
===========
(13) 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,
----------------------------
1996 1997
---- ----
Raw materials . . . . . . . . . . . $1,595,485 $ 980,379
Work in process . . . . . . . . . . 1,043,611 994,600
Finished goods. . . . . . . . . . . 1,200,534 1,186,162
---------- ----------
$3,839,630 $3,161,141
========== ==========
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,
----------------------------
1996 1997
---- ----
Building . . . . . . . . . . . . . $1,155,338 $1,010,680
Laboratory equipment . . . . . . . 3,713,500 3,892,403
Office equipment, furniture and
fixtures . . . . . . . . . . . . 5,011,235 4,985,281
Leasehold improvements . . . . . . 1,015,180 1,092,558
------------ ------------
10,895,253 10,980,922
Less -- Accumulated depreciation
and amortization . . . . . . . . (5,850,983) (6,805,154)
------------ ------------
Net property and equipment . . . . $5,044,270 $4,175,768
============ ============
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of
the following:
As of December 31,
----------------------------
1996 1997
---- ----
Employee benefits. . . . . . . . . $ 512,063 $ 592,288
Accrued royalties. . . . . . . . . 125,025 166,496
Unbilled professional fees . . . . 280,000 381,250
Deferred revenue . . . . . . . . . 73,933 18,000
Accrued taxes. . . . . . . . . . . - 156,093
Liability to the market maker in
subsidiary stock . . . . . . . . 500,000 -
Severance. . . . . . . . . . . . . - 179,698
Other. . . . . . . . . . . . . . . 165,879 203,919
----------- -----------
$1,656,900 $1,697,744
=========== ===========
Other Current Assets
Other current assets as of December 31, 1997 consist
primarily of deferred financing fees of $2.0 million. 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.
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 1997 and 1996 are as follows:
YEAR SHARES ISSUED VALUE
1997 2,888,088 $10,317,520
1996 2,163,242 $12,823,817
In 1997, the Company issued options to purchase 900,000
shares of its 25% owned affiliate OncorMed in consideration for
establishing and extending a line of credit.
In February 1995, the Company entered into a $1.2 million
capital lease of a building.
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
June 1998, 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 26, 1998 By
Stephen Turner
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 26, 1998 Chairman of the
Jose J. Coronas Board
March 26, 1998 Chief Executive
Stephen Turner Officer (Principal
Executive Officer)
March 26, 1998 President, Chief
Cecil Kost Operating Officer
and Director
March 26, 1998 Vice President,
John L. Coker Secretary and
Treasurer
(Principal Financial
Officer)
March 26, 1998 Director
Derace L. Schaffer
March 26, 1998 Director
William H. Taylor II
March 26, 1998 Director
Timothy J. Triche
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 26, 1998 By /s/ Stephen Turner
Stephen Turner
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 26, 1998 /s/ Jose J. Coronas Chairman of the
Board
March 26, 1998 /s/ Stephen Turner Chief Executive
Stephen Turner Officer (Principal
Executive Officer)
March 26, 1998 /s/ Cecil Kost President, Chief
Operating Officer
and Director
March 26, 1998 /s/ John L. Coker Vice President,
John L. Coker Secretary and
Treasurer
(Principal Financial
Officer)
March 26, 1998 /s/ Derace L. Schaffer Director
Derace L. Schaffer
March 26, 1998 /s/ William H. Taylor II Director
William H. Taylor II
March 26, 1998 /s/ Timothy J. Triche Director
Timothy J. Triche
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 February 20, 1998 (except with respect to the financial
condition of the Company described in Note 1, as to which the date is
March 26, 1998, and to the Vysis matter described in Note 8, as to
which the date is March 20, 1998). Our audits were made for the
purpose of forming an opinion on the basic financial statements taken
as a whole. The Schedule II Valuation and Qualifying Accounts 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.,
February 20, 1998
ONCOR, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to Balance
beginning expenses at end
of period (recoveries) Write-offs of period
---------- ------------ ------------- -----------
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
December 31, 1997
- -----------------
Allowance for
doubtful accounts 371,984 46,647 - 418,631
/TABLE
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. 333-00085, 333-00735, 333-11997, 333-20425 and 333-46855,
and into S-8 Registration Statement File Nos. 33-83830 and
33-81021.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 25, 1998