SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
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)
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
At July 31, 1998, there were 31,377,080 shares of Common Stock
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The unaudited consolidated balance sheet as of June 30, 1998, the
audited consolidated balance sheet as of December 31, 1997 and the unaudited
consolidated statements of operations for the three month and six month
periods ended June 30, 1998 and 1997 and of cash flows for the six month
periods ended June 30, 1998 and 1997 set forth below, have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Certain information and note disclosures
normally included in the annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations. Oncor, Inc. (the "Company") believes
that the disclosures made are adequate to make the information presented not
misleading.
In the opinion of management of the Company, the accompanying
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that are necessary for a fair presentation of
results for the periods presented. Management suggests that this financial
information be read in conjunction with the Form 10-K, including "Item 1.
Business -- Additional Risk Factors," filed with the Commission for the year
ended December 31, 1997.
The results for the second quarter and six months ended June 30, 1998,
presented in the accompanying financial statements, are not necessarily
indicative of the results for the entire year.
ONCOR, INC.
CONSOLIDATED BALANCE SHEETS
As of
-----------------------------
June 30, 1998 Dec. 31, 1997
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $518,003 $2,873,765
Short-term investments, at market 90,904 110,547
Restricted cash 3,476,999 2,012,611
Accounts receivable, net of allowance
for doubtful accounts of approxi-
mately $501,000 and $419,000 2,097,611 2,028,239
Receivable from Officer/Director 221,874 296,874
Inventories 2,130,597 3,161,141
Receivable from affiliates - 50,439
Prepaid license 807,257 -
Deferred financing costs 3,684,793 1,961,538
Other current assets 1,354,696 1,075,138
------------- -------------
Total current assets 14,382,734 13,570,292
------------- -------------
NON-CURRENT ASSETS:
Property and equipment, net 4,663,421 4,175,768
Deposits and other non-current assets 1,034,361 397,801
Investment in and advances to affiliates - 856,064
Intangible assets, net 3,689,524 4,884,234
------------- -------------
Total non-current assets 9,387,306 10,313,867
------------- -------------
Total assets $23,770,040 $23,884,159
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $4,950,701 $3,141,845
Accrued expenses and other current
liabilities 1,627,894 1,697,744
Notes payable 4,011,883 3,013,131
Affiliate stock issuable under warrants 2,643,750 3,787,500
Current portion of long-term debt 502,208 551,242
------------- -------------
Total current liabilities 13,736,436 12,191,462
------------- -------------
NON-CURRENT LIABILITIES:
Long-term debt 990,374 5,867,079
Deferred rent 235,773 259,351
------------- -------------
Total non-current liabilities 1,226,147 6,126,430
------------- -------------
Total liabilities 14,962,583 18,317,892
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 2,204,671 2,378,157
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000
shares authorized, 500 shares issued,
entitled to $12,000 per share in
liquidation 5,373,333 -
Common stock, $.01 par value,
50,000,000 shares authorized,
31,456,489 and 27,302,384 issued;
31,377,080 and 27,222,975 outstanding 314,565 273,024
Common stock warrants outstanding 1,190,880 909,630
Additional paid-in capital 150,951,868 137,873,399
Deferred compensation (684,486) (879,020)
Cumulative translation adjustment (2,286,116) (2,184,342)
Accumulated deficit (148,036,746) (132,584,069)
Less - 79,409 shares of common
stock held in treasury, at cost (220,512) (220,512)
------------- -------------
Total stockholders' equity 6,602,786 3,188,110
------------- -------------
Total liabilities and
stockholders' equity $23,770,040 $23,884,159
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
/TABLE
ONCOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------------------------- ----------------------------
GROSS REVENUES:
Product sales $3,347,634 $3,493,665 $6,914,138 $6,698,051
Grants and contracts 94,827 103,499 363,101 226,249
------------- ------------- ------------- --------------
Gross revenues 3,442,461 3,597,164 7,277,239 6,924,300
OPERATING EXPENSES:
Direct cost of sales 1,655,270 2,235,574 3,395,168 4,165,623
Amortization of
intangibles 872,882 289,320 1,149,791 596,439
Write off of acquired
research & development
projects in process - - 5,726,803 -
Selling, general and
administrative 4,204,736 3,577,005 8,892,122 6,818,105
Research and
development 1,983,264 1,990,161 3,793,860 3,530,691
Clinical and
regulatory 280,740 655,981 576,937 1,112,147
------------- ------------- ------------- --------------
Total operating
expenses 8,996,892 8,748,041 23,534,681 16,223,005
LOSS FROM OPERATIONS (5,554,431) (5,150,877) (16,257,442) (9,298,705)
OTHER INCOME (EXPENSE):
Investment income 32,163 170,501 109,954 364,346
Gain on sale of
research assets 1,974,923 - 1,974,923 -
Gain on valuation
of stock options 2,956,250 - 2,956,250 -
Interest and other
expenses, net (1,582,666) (1,053,930) (2,268,101) (3,799,853)
Foreign exchange
gain (loss) 8,596 (20,130) 7,282 (24,917)
Equity in net loss of
affiliates (247,932) (817,445) (1,285,960) (2,116,532)
------------- ------------- ------------- --------------
3,141,334 (1,721,004) 1,494,348 (5,576,956)
Net loss ($2,413,097) ($6,871,881) ($14,763,094) ($14,875,661)
============= ============= ============= ==============
Dividends and
accretion on
convertible
preferred stock (112,500) - (689,583) -
------------- ------------- ------------- --------------
NET LOSS APPLICABLE TO
COMMON STOCK ($2,525,597) ($6,871,881) ($15,452,677) ($14,875,661)
============= ============= ============= ==============
BASIC AND DILUTED
NET LOSS PER SHARE ($0.08) ($0.27) ($0.52) ($0.59)
============= ============= ============= ==============
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING 30,935,713 25,293,839 29,671,319 25,081,010
============= ============= ============= ==============
The accompanying notes are an integral part of these
consolidated financial statements.
/TABLE
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended June 30,
------------------------------------
1998 1997
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($14,763,094) ($14,875,661)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on revaluation of options (2,956,250) -
Gain on sale of research assets (1,974,923) -
Issuance of common stock for interest
of convertible notes 67,191 2,800,000
Issuance of common stock in
connection with research and
development agreements - 223,362
Write off of acquired research &
development 5,726,803 -
Depreciation and amortization 1,992,692 1,230,428
Expenses for non-employee stock options 325,784 214,235
Equity in net loss of affiliate
and other 1,285,960 2,137,115
Changes in operating assets
and liabilities:
Accounts receivable (106,842) 217,244
Inventories 3,567 (57,682)
Other current assets 1,021,788 (641,828)
Deposits and other non-current assets (649,384) 24,465
Accounts payable 1,681,141 (636,168)
Accrued expenses and other
liabilities (201,281) 1,268,225
Deferred rent (23,578) 406,061
------------- -------------
Net cash used in operating
activities (8,570,426) (7,690,204)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (368,470) (324,862)
Proceeds from sale of research assets 3,105,000 -
Cash acquired in Codon acquisition 52,044 -
Purchases of investments 19,643 (2,609,165)
------------- -------------
Net cash provided by (used in)
investing activities 2,808,217 (2,934,027)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 4,965,000 -
Exercise of stock options and warrants 37,500 37,634
Change in restricted funds (1,473,984) 3,537,210
Payment on bank loans (941,337) (500,242)
Loan to unconsolidated affiliate (674,415) (622,198)
Proceeds from borrowings and issuance
of warrants 1,523,803 2,051,865
------------- -------------
Net cash provided by financing
activities 3,436,567 4,504,269
------------- -------------
------------- -------------
EFFECT OF CHANGE IN EXCHANGE RATE ON CASH (30,120) (748,358)
------------- -------------
Net decrease in cash and cash
equivalents (2,355,762) (6,868,320)
CASH AND CASH EQUIVALENTS, beginning of
the period 2,873,765 13,058,657
------------- -------------
CASH AND CASH EQUIVALENTS, end of the
period $518,003 $6,190,337
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In February 1998, the Company exchanged approximately 1,650,013
shares of common stock for all the remaining shares of Codon
Pharmaceuticals, Inc.
The accompanying notes are an integral part of these
consolidated financial statements.
/TABLE
ONCOR, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1998
(Unaudited)
1. Cash Equivalents and Investments
Cash equivalents and investments consist primarily of funds invested in
money market instruments, commercial paper and U.S. government treasury bills.
Investments with maturities between three months and one year are classified
as short-term investments. Investments in securities with original maturities
of three months or less are considered cash equivalents. Cash of
approximately $3.4 million is held in escrow pursuant to a lawsuit brought by
a former employee in France ($1.0 million) and, pursuant to Bulk Sales laws of
the State of Maryland, proceeds from the sale of the Company's Research
Products Assets ($2.4 million), for which the restriction was subsequently
eliminated and the funds utilized for working capital purposes.
Investments that are classified as available-for-sale securities are
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.
2. Intangible Assets
The intangible assets are the result of an acquisition made in 1994.
They comprise (i) technology acquired, and (ii) the excess of the purchase
price over the fair market value of the tangible assets acquired. The
intangible assets had been amortized on a straight line method over periods of
five to ten years, with a weighted average amortization period of eight years.
Due to current market factors and related factors in the second quarter, the
Company recognized an impairment reserve against the intangible assets and a
charge to amortization of intangibles in an amount of approximately $0.6
million.
3. 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.
4. Divestiture of Operating Business Assets
On April 9, 1998, the Company completed a transaction with Vysis, Inc.
in which Oncor conveyed to Vysis $0.5 million in cash and full rights and
title to its non-oncology genetics probe assets ("Genetics Assets"), including
primarily inventory and intellectual property, in exchange for two licenses to
patents owned or licensed to Vysis. In addition, the parties agreed to settle
all legal action between them with respect to a suit brought by Vysis against
the Company in September, 1995. The licenses have primary terms of two years
and may be renewed thereafter for the remainder of the lives of patents for a
cash payment of $1.5 million. The Company recorded as an intangible asset the
value of the licenses acquired in an amount of $1.7 million equal to the net
book value of the assets conveyed. Accordingly, no gain or loss was
recognized in the disposition of the Genetics Assets. The intangible asset is
being amortized ratably over the primary period of the licenses. The sales of
the product lines associated with the Genetics Assets had sales to parties
outside the consolidated group of approximately $2.4 million in 1997.
On June 30, 1998, the Company completed the sale of its Research
Products Assets, including primarily inventory, laboratory equipment and
intellectual property, to Intergen Company for cash consideration of $3.1
million, all of which was paid at closing or shortly thereafter. The Company
recorded to non-operating income a gain on the disposition of the Research
Products Assets in the amount of $2.0 million. The Research Products Assets
had sales to parties outside the consolidated group of approximately $3.1
million in 1997.
5. Contingency
A former employee brought suit against the Company in France for
approximately $0.4 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.
6. Increased Line of Credit
During the second quarter of 1998, the Company increased a secured
line of credit from $3.0 million to $4.5 million which was thereafter reduced
to $4.0 million. The Company has borrowed the full amount of the line. To
obtain required consents and increases in the amount available under the line
of credit, the Company granted warrants to purchase an aggregate of 2,900,000
shares of its common stock at exercise prices ranging from $0.50 to $1.00 per
share, and granted a repricing of outstanding options to purchase an aggregate
of 1,100,000 shares of Common Stock of Oncormed, Inc., an affiliate of the
Company. A charge representing the estimated fair market value of these
grants was made in the amount of $3.3 million to deferred financing fees, and
is being amortized to interest expense over the remaining term of the secured
line of credit.
7. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. The Company
implemented SFAS No. 130 effective January 1998. Foreign currency translation
adjustments are the significant component of Comprehensive Income under SFAS
No. 130.
Disclosure of Comprehensive Loss
For the Six Months Ended For the Three Months Ended
June 30, June 30,
-----------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------
Net Loss ($14,763,094) ($14,875,661) ($2,413,097) ($6,871,881)
Foreign currency
translation
adjustments (101,774) 1,474,683) 127,054 (452,650)
Unrealized gain
(loss) on
securities:
Unrealized holding
gains (losses)
arising during the
period -0- 1,016 77 3,126
------------- ------------- ------------ ------------
Comprehensive loss ($14,864,868) ($16,349,328) ($2,285,966) ($7,321,405)
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 131 is effective for the Company's 1998 year-end financial
statements. SFAS No. 131 requires an enterprise to report certain additional
financial and descriptive information about its reportable operating segments.
Management does not expect that the implementation of SFAS No. 131 disclosures
will have a material impact.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 consolidated financial statements of
the Company and notes thereto found elsewhere in this Form 10-Q, and the
audited consolidated financial statements of the Company and notes thereto,
which were included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997. This Report contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Readers are cautioned that such statements are
only predictions and that actual events or results may differ materially. In
evaluating such statements, readers 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 under the
caption "Risk Factors."
Overview
The Company has incurred significant cash losses throughout its
existence and has no expectations to achieve cash positive operations until
during 1999. The Company's current cash position is nearly depleted and any
cash infusions would likely be required to be utilized first to repay, in
whole or in part, bank debt obligations of $4.0 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.
Effective February 28, 1998, the Company acquired all remaining
outstanding shares of Codon Pharmaceuticals, Inc., formerly known as
OncorPharm, Inc. ("Codon"). As a result of this transaction, Codon's
operating expenses and losses have been and will continue to be included in
the operating results of the Company from the effective date of the
acquisition.
Strategic Repositioning of the Company
During the second quarter of 1998, the Company entered into transactions
for the disposition of its two largest operating units: the non-oncology
genetics probe business (the "Genetics Assets") and the Research Products
Assets. These dispositions are described below. Together, sales of the
product lines associated with these assets comprised more than 42% of the
consolidated sales of the Company in 1997. The Company's remaining sources of
product revenues are from sales generated by (1) its European operation, and
(2) its oncology-based genetic products. In the aggregate, sales of these
remaining products were $8.5 million in 1997.
Genetics Assets
On April 9, 1998, the Company completed a transaction with Vysis, Inc.
in which Oncor conveyed to Vysis $0.5 million in cash and full rights and
title to its non-oncology genetics probe assets, including primarily inventory
and intellectual property, in exchange for two licenses to patents owned or
licensed to Vysis. In addition, the parties agreed to settle all legal action
between them arising out of a suit brought by Vysis against the Company in
September, 1995. The licenses have primary terms of two years and may be
renewed thereafter for the remainder of the lives of patents for an additional
cash payment of $1.5 million. The Company recorded as an intangible asset the
value of the licenses acquired in an amount of $1.7 million equal to the net
book value of the assets conveyed. Accordingly, no gain or loss was
recognized in the disposition of the Genetics Assets. The intangible assets
are being amortized ratably over the primary period of the licenses. The
sales of the product lines associated with the Genetics Assets had sales to
parties outside the consolidated group of approximately $2.4 million in 1997.
Research Products Assets
On June 30, 1998, the Company competed the sale of its Research Products
Assets, including primarily inventory, laboratory equipment and intellectual
property, to Intergen Company for cash consideration of $3.2 million, all of
which was paid at closing or shortly thereafter. The Company recorded to
non-operating income a gain on the disposition of the Research Products Assets
in the amount of $2.0 million. The sales of the product lines associated with
Research Products Assets had sales to parties outside the consolidated group
of approximately $3.1 million in 1997.
Results of Operations
Operating Results -- Overview
The acquisition and consolidation of Codon in the first quarter of 1998
had the effect of increasing the reported research, development, general and
administrative expenses of the Company thereafter by the level of expenses
incurred by Codon. Such additional expenses will continue until such time, if
ever, as the Company disposes of all or a majority interest in Codon. The
divestitures of the Genetics Assets and Research Products Assets at the
beginning and end, respectively, of the second quarter of 1998 did not have a
significant effect on the level of operating expenses of the Company in the
first half or second quarter of 1998. Severance payments and other
transactional costs associated with those divestitures more than offset the
associated reduction in costs of operating the remaining business on an
on-going basis. The Company believes that the operational efficiencies
associated with these divestitures will first be recognized in the third
quarter of 1998. Due to the divestitures of the Genetics Assets and the
Research Products Assets, in the future, the Company will have no revenues
from these assets.
At the end of 1997, the Company received approval of the FDA to market
its INFORM(R) breast cancer prognostic test (hereinafter "INFORM(R)"), for
which sales commenced in the first half of 1998.
Operating Results -- Analysis
Product sales decreased by 4% to $3.3 million and increased by 3% to
$6.9 million in the second quarter and first half, respectively, of 1998 from
$3.5 million and $6.7 million in the corresponding periods of the previous
year. In the second quarter of 1998, the elimination of sales of the product
lines associated with the Genetics Assets more than offset improved sales of
the product lines associated with the Research Products Assets, divested at
the end of the quarter, and sales of INFORM(R). In the first half of 1998,
sales of INFORM(R) and improved sales of research products were responsible
for the increase.
Contracts and grants revenue changes were not significant in any period
presented.
Product gross margins improved to 51% in each of the second quarter and
first half of 1998 from 36% and 38%, respectively, in the corresponding
periods of the previous year. The improvement in margins is attributable to
(1) an elimination of low margin products offered in Europe and the United
States, (2) non-recurring inventory valuation adjustments in the second
quarter and first half of 1997 and (3) sales of INFORM(R) in 1998 at higher
margins than those for other products of the Company, in the aggregate, more
than offsetting the unfavorable effects of (1) spreading fixed manufacturing
costs over a lower manufacturing base and (2) amortizing product licenses
acquired in the divestiture of the Genetics Assets. With the elimination of
non-oncology genetics and research products manufacturing activity for all
future periods, the Company cannot determine if sales of INFORM(R) in the
immediate future will be sufficient to offset the downward effect on margins
from the reduced level of activity resulting from the divestitures.
The amortization of intangibles increased to $0.9 million and $1.1
million in the second quarter and first half of 1998, respectively, from $0.3
million and $0.6 million in the corresponding periods of the previous year.
This increase is the result of the Company's determination to record an
impairment reserve of approximately $0.6 million against the intangible assets
acquired with the acquisition of Appligene. Management cannot determine
whether additional charges to impairment will be required in future periods.
Selling, general and administrative expenses increased 17% to $4.2
million and 31% to $8.9 million in the second quarter and first half,
respectively, of 1998 from $3.6 million and $6.8 million in the corresponding
periods of the previous year. During the second quarter of 1998, sales and
marketing expenses increased while general and administrative expenses
decreased. During the first half of 1998, both categories of expenses
increased. Each of these categories is discussed below.
The increase in sales and marketing expense in the second quarter and
first half of 1998, when compared with the corresponding periods in the
preceding year, is attributable to expenses associated with the launch of the
marketing program for INFORM(R). The most significant elements of the
marketing program include adding to the marketing and sales management of the
Company, reconfiguring the field sales force and preparing advertising and
other promotional materials. In large measure, such expenses are expected to
continue as the Company continues to devote substantial resources to its
diagnostics marketing efforts. In addition, sales and marketing expenses
increased substantially in Europe due to additions to the field sales force,
primarily in the United Kingdom.
The decrease in general and administrative expenses in the second
quarter of 1998, when compared with the corresponding period in the preceding
year, is attributable to a reduction in executive personnel both at the parent
company and at its consolidated subsidiaries. Management believes that such
efficiencies will continue at least through the end of 1998. The increase in
general and administrative expenses in the first half of 1998, when compared
with the corresponding period in the preceding year, is attributable to the
substantial legal expenses incurred in the first half of 1998 in the defense
of certain key intellectual property rights of the Company and, to a lesser
extent, to the acquisition of Codon, more than offsetting the lower expenses
associated with senior management. The intellectual property dispute between
the parties was settled as a part of the divestiture of the Genetics Assets
described above; accordingly, such expenses are not expected to recur in the
foreseeable future.
Research and development expenses remained the same in the second
quarter of 1998 compared to the corresponding period of 1997. An increase due
to the consolidation of Codon was offset by a decrease due to the termination
or substantial reduction in sponsored research arrangements with several
institutions and to a reduction in the efforts to file and prosecute patent
applications. Management believes that expenses associated with institutional
sponsored research and patent prosecution will continue at the current lower
rate throughout the remainder of 1998.
Research and Development expenses increased 7% to $3.8 million in the
first half of 1998 from $3.5 million in the corresponding period of the
previous year. Such increase is attributable to the acquisition of Codon,
more than offsetting the benefits of the aforementioned reductions in expenses
related to sponsored research agreements.
The charge for research projects in process of $5.7 million in the first
half of 1998 was a result of the acquisition of Codon.
Clinical and regulatory expenses decreased by 57% to $0.3 million and by
48% to $0.6 million in the second quarter and first half, respectively, of
1998 from $0.7 million and $1.1 million in the corresponding periods of the
previous year. Such decreases are attributable to the completion of clinical
trials for INFORM(R) at several sites in 1997 and to decreases in staffing
levels.
Other net income (expense) was net income of $3.1 million and $1.5
million in the second quarter and first half respectively of 1998 as compared
to net expense of $1.7 million and $5.6 million in the corresponding periods
of the preceding year. The wide fluctuations in these amounts are discussed
below.
In the second quarter and, accordingly, the first half of 1998, other
income (expense) was significantly affected by four transactions: (1) the
sale of the Research Products Assets which generated a gain of $2.0 million;
(2) a significant reduction in the market value of affiliate stock subject to
outstanding options which resulted in a reduction in the liability recorded
for the obligations of the Company to issue the shares and a corresponding
gain of $3.0 million; (3) the issuance of options in the stock of the Company
and its affiliates in exchange for certain financing concessions and
extensions which resulted in an additional charge to deferred financing
expenses of $3.8 million and a corresponding additional amortization to
interest expense in the second quarter of $0.9 million; and (4) the
acquisition of Codon which reduced the equity in net loss of affiliates by
$0.6 million.
The amortization of interest expense will continue at a rate in excess
of $0.9 million per month through October 1998. While there can be no
assurance as to the future market price of the stock of the affiliate, the
affiliate has entered into a definitive merger agreements which could cause
the price of its stock to increase substantially, thereby creating additional
liability and loss for Oncor in the third quarter of 1998. The completion of
such transaction would likely also generate substantial non-operating income
for the Company attributable to its holdings in affiliate stock not subject to
outstanding options.
As a result of the factors discussed above, net loss
decreased 65% to $2.4 million in the second quarter of 1998 from $6.9 million
in the corresponding period of the previous year. Net loss remained the same
at approximately $14.8 million in the first half of 1998 and of 1997.
Liquidity and Capital Resources
Overview
The consolidated cash and liquid investments balances of the Company
were $0.7 million and $4.1 million at July 31, 1998 and June 30, 1998,
respectively, compared to $5.0 million at December 31, 1997. Approximately
$0.5 million and $1.4 million of the cash and liquid investments at July 31,
1998 and June 30, 1998, 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.
Analysis of Historical Cash Losses
The following table sets forth the most significant elements of the cash
flows of the Company in the first six months of 1998 (in millions of dollars):
Cash and liquid investments at January 1, 1998 $5.0
Net cash used in operating activities (8.6)
Proceeds from issuance of convertible preferred stock 5.0
Loans to affiliate (0.7)
Purchases of equipment (0.4)
Cash received in connection with sale of the
Research Products Assets 3.1
Borrowings under a bank line of credit 1.5
Repayment of debt (0.9)
---------
Cash and liquid investments at June 30, 1998 $4.0
=========
Pursuant to Bulk Sales laws of the State of Maryland, approximately $2.4
million of the cash and liquid investments, representing a portion of the cash
proceeds from the sale of the Research Products Assets, was held in escrow in
the United States at June 30, 1998. Such amounts were utilized thereafter for
working capital purposes. Approximately $1.0 million of the cash and liquid
investments is held in escrow in France pending the outcome of legal disputes
between the Company and the former President of Appligene. The more important
of such disputes was tried in the second quarter of 1998 and a final
determination is pending.
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.
Proceeds from issuance of convertible preferred stock relate to a
private placement of securities made by the Company in January 1998. The
loans to affiliate represent 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.
Purchases of equipment are for the on-going 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(R). 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.
Cash received in connection with the sale of the Research Products
Assets and borrowings under a bank line of credit are discussed above.
Repayment of debt includes $0.5 million of repayments under the bank line of
credit and $0.4 million of repayment of debt.
As of July 31, 1998, the Company had an available consolidated cash
balance of approximately $0.7 million, of which approximately $0.5 million is
available for use in the Company's North American operations. In addition,
the Company generated cash of $1.0 million on or about August 12, 1998 from
the exercise of certain outstanding options to purchase shares of an affiliate
of the Company. The Company expects that its current liquid resources will
not be sufficient to fund operations after the end of September 1998. The
Company is considering additional alternative forms of financing, including
among other things, equity or debt financing, sale of publicly-traded Oncormed
Common Stock, recovery of Oncor advances to Codon, sale of Appligene stock and
other alternatives. Following the February 1998 acquisition of Codon, Oncor
includes in its consolidated cash position any amounts raised through the
separate financing efforts of Codon. Funds, if any, raised from most of these
possible sources will likely first be utilized to repay, in whole or in part,
the Company's bank debt of $4.0 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.
During the second quarter of 1998, the Company increased its secured line
of credit from $3.0 million to $4.5 million, which was thereafter reduced to
$4.0 million. The Company has borrowed the full amount of the line of credit.
To obtain this additional financing, and to obtain required waivers and
consents from the guarantors of the line of credit pursuant to which the
Company was released from its obligation to use all cash raised through the
sale of assets to repay the line of credit, (i) the Company granted to such
guarantors warrants to purchase an aggregate of 2.9 million shares of its
common stock at exercise prices ranging from $0.50 to $1.00 per share and (ii)
the Company granted the guarantors options to purchase shares of Common Stock
of Oncormed, Inc., a publicly-traded affiliate of the Company ("Oncormed").
In connection therewith, during the second quarter, the Company adjusted the
per share exercise price of options to purchase 1.0 million shares of Oncormed
from $2.00 per share to $1.50 per share and granted 100,000 options with an
exercise price of $1.70 per share. During the third quarter, the Company
further adjusted the per share exercise price of the $1.50 options to $0.90
and adjusted the per share exercise price of the $1.70 options to $1.00, in
order to induce the holders of such options to waive the cashless exercise
feature and to immediately exercise such options. As a result of the exercise
of such options, the Company generated cash of $1.0 million on or about
August 12, 1998.
The Company holds 2.0 million shares of Common Stock in Oncormed, of
which 1.1 million are subject to outstanding options as described above.
Since April 1, 1998, the shares of Common Stock of Oncormed have traded in the
range of $1.75 to $5.38 per share. In July, 1998, Oncormed announced that it
had reached a definitive agreement (the "Oncormed Merger Agreement") to merge
with Gene Logic, Inc. ("Gene Logic"). Pursuant to the terms of this
transaction, which has not yet been consummated, Gene Logic will issue an
aggregate of 4,849,815 shares of Gene Logic Common Stock to holders of
Oncormed Common Stock, including the Company, subject to adjustment if the
average closing price of Gene Logic's Common Stock for the fifteen days ending
the second day prior to the meeting at which the stockholders of Gene Logic
will meet to approve the transaction (the "Closing Price") is more than $7.88.
However, in the event the Closing Price is less than $6.34 per share, Oncormed
may terminate the Oncormed Merger Agreement in accordance with its terms. As
a consequence, if the foregoing transaction is consummated, Oncor will receive
shares of Gene Logic Common Stock with a publicly-traded value of between
$2.94 and $3.66 for each share of Oncormed exchanged pursuant to the merger,
depending on the share price of Gene Logic Common Stock during such
fifteen-day period and subject, under certain circumstances, to adjustment
below $2.94 for each share exchanged. The transaction is subject to approval
by the shareholders of Oncormed and Gene Logic and to other contractual
conditions. There can be no assurance that the transaction will be completed
in accordance with the proposed terms or at all. In conjunction with this
proposed transaction, Oncor has agreed to vote in favor of the merger and not
to trade any of its shares that are not subject to outstanding options for a
period ending 60 days after the completion of the transaction (the "60-day
Lock-Up Period"). Furthermore, the Company has agreed that during the 30-day
period (the "30-day Lock-Up Period") following the 60-day Lock-Up Period, it
will not dispose of more than the greater of 1% of the outstanding shares of
Gene Logic Common Stock and the average weekly reported trading volume of Gene
Logic Common Stock during the four calendar weeks preceding the date of any
such disposition (such number being hereinafter referred to as the "Permitted
Disposition Amount"). Finally, the Company has agreed that during each
three-month period commencing on the day following the end of the 30-day
Lock-Up Period, it will not dispose of more than the Permitted Disposition
Amount. The Company believes that its holdings in Gene Logic Common Stock,
notwithstanding the foregoing lock-up agreement, will provide the Company with
substantially more liquidity for its Oncormed Common Stock than it had
previously.
The Company is restricted from selling 1.1 million such shares to
Gene Logic or 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 prices ranging from $0.90 to $1.00 per share. On or about August
12, 1998, the holders of such options exercised such options, which generated
cash to Oncor equal to $1.0 million. If the above-described merger
transaction is not completed, the remaining 0.9 million shares of Common Stock
of Oncormed can be sold in the public markets only pursuant to restrictions on
the sale of unregistered stock by an affiliate pursuant to Rule 144 of the
Securities Act of 1933 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 holds 100% of the outstanding stock of Codon, Inc. ("Codon").
In addition, the Company has advanced to Codon approximately $3.7 million as
of July 31, 1998, pursuant to an unsecured demand note. Codon currently is in
negotiations with a potential purchaser for substantially all of the assets of
Codon. Any proceeds from such transaction would go first to satisfy Codon's
obligations to Oncor and to Codon's other creditors, obligations to whom are
not significant. There can be no assurance that the proposed transaction will
be completed or, if completed, that cash proceeds would be sufficient to
satisfy all creditors including Oncor. Even in the event of complete
satisfaction of obligations to creditors, it is unlikely that any remaining
proceeds to be distributed to Oncor as its sole shareholder would be
significant.
The Company owns 80% of the outstanding stock of Appligene - Oncor SA
("Appligene"), which is headquartered in Strasbourg, France. The remaining
20% is held by public shareholders. Due to the divestitures of business units
by Oncor as described above, Oncor and Appligene no longer supply each other
with significant amounts of products. The Company is currently in discussions
with certain parties which have expressed interest in acquiring Oncor's
position in Appligene. Appligene is currently experiencing significant
operating losses and has stated that its ability to continue in existence for
the indefinite future is in doubt, without additional capital or substantial
operating improvements. It is contemplated that an acquiror of Oncor's
position likely would be in a better position than Oncor to provide such
capital and improvements. There can be no assurance that the current
discussions will result in a completed transaction.
There can be no assurance that any of the alternatives discussed above,
or any 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 stockholders; 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. The Company has taken, and is continuing to take,
substantial cost-cutting actions, including significant reductions in its
number of employees. In the event that the Company is unable to raise
additional capital by the end of September 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.
Requested Redemption of Series A
Convertible Preferred Stock
On August 7, 1998 and August 11, 1998, the Company received requests from
the holders of its Series A Convertible Preferred Stock (the "Preferred
Stock"), which had an aggregate original issuance amount equal to $5.0
million, to have their shares of Preferred Stock redeemed. As of August 13,
1998, none of the holders of Preferred Stock had completed all of the steps
necessary for redemption. In any event, the Company believes that the holders
of the Preferred Stock have not tendered a valid redemption request and,
therefore, the Company will not comply with the requested redemption. There
can be no assurance that such redemption request will ultimately be found to
be invalid. In the event that such redemption request is ultimately held to
be valid, and the Company is unable to obtain the funds necessary to redeem
the Preferred Stock, the non-payment of such redemption amounts would have a
material and adverse effect on the Company's business, results of operations
and financial condition.
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. This
engagement has been extended, but there can be no assurance that any such
transaction will be concluded.
Year 2000 Compliance
The Company has begun an assessment of the effects of year 2000,
including establishment of a task force to manage the process, but has not
completed its assessment, planning, or contingencies. At this point in the
assessment process, and based on very preliminary estimates, the Company
believes that the resources required to meet with year 2000 compliance will
not be material to the Company. The expected resources required will be the
replacement of certain hardware and software, and the related efforts require
to implement these changes. The Company believes that the risks to the
Company could be the possible failure of certain systems for a brief period of
time; however, at this point in the assessment process, the Company believes
that these delays will not have a material, adverse effect on the operations
of the Company.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is
the total of net income and all other non-owner changes in equity. The
Company implemented SFAS No. 130 effective January 1998. Foreign currency
translation adjustments are the significant component of Comprehensive Income
under SFAS No. 130.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 131 is effective for the Company's 1998 year-end financial
statements. SFAS No. 131 requires an enterprise to report certain additional
financial and descriptive information about its reportable operating segments.
Management does not expect that the implementation of SFAS No. 131 will have a
material impact on the Company's financial position or results of future
operations.
Risk Factors
History of Operating Losses
Oncor has not been profitable since its inception in July 1983. For the
quarter ended June 30, 1998, the Company incurred net losses of approximately
$2.4 million and as of that date, the accumulated deficit of the Company was
$148 million. The Company expects to incur additional losses in future
periods. The Company believes it will become profitable sometime in 1999, but
cannot provide assurance as to when, if ever, it will achieve profitability.
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 September 1998. Funds, if any,
raised from most of the possible sources during the intervening period may
first be utilized to repay, in whole or in part, the Company's bank debt of
$4.0 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 additional alternative forms of financing,
including among other things, equity or debt financing, sale of
publicly-traded Oncormed Common Stock, recovery of Oncor advances to Codon,
sale of Appligene stock and other alternatives.
There can be no assurance that any of the alternatives discussed above,
or any 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. The Company has taken, and is continuing to take,
substantial cost-cutting actions, including significant reductions in its
number of employees. In the event that the Company is unable to raise
additional capital by the end of September 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.
No Assurance of Continued Listing of Common Stock
Due to its history of losses and other related factors, the Company
continues to be below certain guidelines for continuing listing of its common
stock on its principal exchange, the American Stock Exchange (the "Exchange").
The Exchange has the authority to invoke or waive the guidelines at its sole
discretion. In July 1998, the Exchange requested, and the Company agreed that
it will provide the Exchange with, certain financial information and
projections in support of continued listing. There can be no assurance that
this information will be satisfactory to the Exchange and that the Company's
stock will continue to be listed on the Exchange. If the Company's stock were
delisted from the Exchange, any alternative public markets or exchanges that
may be available to the Company likely would provide substantially less
liquidity and market support for the shareholders of the Company and
materially and adversely affect the ability, if any, of the Company to raise
additional equity capital in the future.
Requested Redemption of Series A
Convertible Preferred Stock
On August 7, 1998 and August 11, 1998, the Company received requests
from the holders of its Series A Convertible Preferred Stock (the "Preferred
Stock"), which had an aggregate original issuance amount equal to $5.0
million, to have their shares of Preferred Stock redeemed. As of August 13,
1998, none of the holders of Preferred Stock had completed all of the steps
necessary for redemption. In any event, the Company believes that the holders
of the Preferred Stock have not tendered a valid redemption request and,
therefore, the Company will not comply with the requested redemption. There
can be no assurance that such redemption request will ultimately be found to
be invalid. In the event that such redemption request is ultimately held to
be valid, and the Company is unable to obtain the funds necessary to redeem
the Preferred Stock, the non-payment of such redemption amounts would have a
material and adverse effect on the Company's business, results of operations
and financial condition.
Recent Disposition of Non-Strategic Assets
The Company has recently completed the sale or other conveyance of its
two non-strategic asset groups: the research products assets and the
non-oncology genetic probe systems assets. As a result, the scope of the
Company's business (including its revenue base) and its number of products has
been reduced significantly. The Company's few remaining products presently
marketed in North America are cancer-related genetic probe tests, including
the INFORM(R) HER-2/neu diagnostic test, which currently is sold to a limited
number of customers. The disposal of each of these asset groups has resulted
in a significant decrease in the number of employees in the Company and in the
number of patents and trademarks owned by the Company. There can be no
assurance that the disposition of these two asset groups will not have a
material adverse effect on the business, financial condition and results of
operations of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview -- Strategic
Repositioning of the Company."
Risk Associated with the INFORM(R) Her-2/neu Gene-Based Test System
Although the Premarket Approval ("PMA") for the Oncor INFORM(R) HER-2/neu
Gene Detection System was approved for marketing by the U.S. Food and
Drug Administration (the "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 requires 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, and its
licensors', ability to obtain patents, defend their 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 from the courts 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 University of California and its licensee, Vysis, Inc. ("Vysis"),
filed suit against Oncor on September 5, 1995 for infringement of U.S. Patent
No. 5,447,841 entitled Methods and Compositions for Chromosome Specific
Staining which issued on that same date. The patent relates to a method of
performing in situ hybridization using a blocking nucleic acid that is
complementary to repetitive sequences. On April 9, 1998, the Company, Vysis
and the University of California entered into a definitive agreement to settle
the litigation. In connection with the settlement, the Company obtained
certain non-exclusive royalty bearing licenses, made an initial payment of
$0.5 million to Vysis, and an additional payment of $1.5 million will be due
on April 10, 2000 in order to extend the license beyond that date.
The commercial success of the Company will also depend upon avoiding the
infringement of patents issued to competitors and others 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 U.S. Patent and Trademark Office ("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.
On April 27, 1998, the Company received a summons and complaint in
connection with a lawsuit entitled Key Technology, Inc. v. Oncor, Inc. in the
Superior Court of the State of Washington for the County of Walla Walla. The
complaint alleges breach of contract and fraud in connection with a June 1996
asset purchase agreement between Key Technology and the Company relating to
the sale of the Company's I300 video inspection system to Key Technology, and
seeks damages against the Company of $1.5 million. A failure to successfully
defend against or settle that suit would likely result in damages being
assessed against the Company and could have a material adverse effect on the
Company's financial condition and results of operation.
On May 29, 1998, a complaint was filed against the Company in the U.S.
District Court for the Eastern District of New York by Paul Diamond, alleging
that the Company is infringing his U.S. Patent No. 5,597,697 by making, using,
and selling its SUNRISE(TM) DNA amplification detection system. While the
Company believes that the action, which was filed pro se (without the
assistance of counsel), is without merit, patent litigation is generally
costly and the disposition or outcome of this case cannot be predicted with
certainty.
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(R)
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 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
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
at least 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.
Investment in Oncormed, Appligene, and Codon
The Company owns approximately 23% 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 represents 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. The Company does not control the day-to-day operations and
management of these companies and, therefore, has a varying but limited
direct control over their operations and financial results.
As described above, Oncormed announced in July 1998 that it had reached
a definitive agreement to merge with Gene Logic which, if consummated, will
result in Oncor's shares of Oncormed not subject to outstanding options being
converted into shares of Gene Logic. However, there can be no assurance that
the merger between Oncormed and Gene Logic will, in fact, be consummated and
in the event such merger is not consummated, the shares of Oncormed owned by
Oncor that are not subject to outstanding options can be sold in the public
markets only pursuant to restrictions on the sale of unregistered stock by an
affiliate pursuant to Rule 144 of the Securities Act of 1933 such that the
complete liquidation of Oncor's position in Oncormed likely would take a year
or more. See "Management's Discussion and Analysis of financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Analysis of
Historical Cash Losses."
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 Analyte 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.
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 the Company's ability to attract
and retain such personnel is adversely affected by the current financial
condition of the Company; therefore, there can be no assurance that the
Company will be able to continue to attract and retain such personnel.
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.
Volatility of Stock Price
The market prices for securities of life sciences companies, including
the market prices of the Company's Common Stock, 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 5. Other Information on Form 10-Q.
As disclosed in the Company's latest proxy statement, the deadline for
submitting proposals to be considered for inclusion in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders is February 1, 1999.
Pursuant to recent amendments to Rule 14a-4(c)(1) under the Securities
Exchange Act of 1934, as amended, the Company will have discretionary voting
authority if a proponent does not notify the Company by April 12, 1999 of
their intent to present a proposal from the floor at the 1999 Annual Meeting
of Stockholders or of their intent to commence a proxy solicitation for the
1999 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K.
a. The following exhibits are filed as part of this report on Form 10-Q.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONCOR, INC.
(Registrant)
Date: August 14, 1998 /s/ Jose J. Coronas
Jose J. Coronas, Chairman and
Acting Chief Executive Officer
Date: August 14, 1998 /s/ Cecil Kost
Cecil Kost, President and Chief
Operating Officer
Date: August 14, 1998 /s/ John L. Coker
John L. Coker, Vice President
of Finance and Administration,
Chief Financial Officer