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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
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.
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(Exact name of registrant as specified in its charter)
MARYLAND 52-1310084
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(State of Incorporation) (I.R.S. Employer Identification No.)
209 PERRY PARKWAY
GAITHERSBURG, MARYLAND 20877
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(Address of principal executive offices)
(Zip code)
(301) 963-3500
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(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)
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(Title of Class)
Redeemable Common Stock Purchase Warrants
-----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO ____
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [x]
At February 28, 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. relating to the Annual Meeting of Shareholders
to be held in June 1998, which is incorporated into Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7. Management's Discussion and Analysis
of Financial Condition and Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8. Consolidated Financial Statements and
Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9. Changes in and Disagreements on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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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.
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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
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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.
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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 to the development of methods for the
detection of minute 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.
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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.
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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. 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.
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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.
Effective February 28, 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%. This transaction has been accounted for
as a purchase. Of the purchase price of approximately $6.2 million, $5.7
million has been allocated to research and development projects in process and
expensed in the first quarter of 1998. As a result of this transaction, all of
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. The
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Company henceforth will include in its consolidated cash position any amounts
raised through the separate financing activities of Codon.
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. As of May 1, 1998, the
Company had 31 employees engaged in research and development, including 29 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 25 employees as of May 1, 1998, 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
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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
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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.
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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
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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.
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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.
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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 COATTM,
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.
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EMPLOYEES
The Company had 161 employees at May 1, 1998, including 32 employees
in research, clinical and related laboratory personnel; 58 employees in sales
and marketing; and 71 employees in administration, finance, regulatory affairs,
production and distribution. Of these employees, 68 resided and worked in
Europe as of such date. Of the 32 laboratory employees, 29 have Ph.D.'s. 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 quarter ended March 31, 1998, the Company incurred net losses of
approximately $12.3 million and as of that date, the accumulated deficit of the
Company was $145.3 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 May 1998. Funds, if any, raised
from most of the possible sources during the intervening period must first be
utilized to repay, in whole or in part, the Company's bank debt of $3.5 million
in accordance with the terms of the underlying line of credit and related
guarantees. In April 1998, the Company increased its secured line of credit from
$3.0 million to $3.5 million, which the Company has fully drawn down. 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 certain non-strategic
assets, including the Research Products Division and the Company's interests in
certain other affiliates, as well as the sale of other 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.
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There can be no assurance that any of the alternatives discussed
above, or any other 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 May 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 first quarter of 1998 in the range of $4.75 to $7.50 per share. The
Company is restricted from selling 1.0 million such shares in the public
markets due to outstanding options it has issued or anticipates issuing
pursuant to which the Company has offered to sell the shares to the option
holders for $2.00 per share. While exercise of such options would generate
cash of approximately $2.0 million, such exercise is outside the control of the
Company. The remaining 1.0 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 is also considering
attempting to secure a purchaser for a block of the stock in a private
transaction and currently is holding discussions with potential purchasers
pursuant to this effort.
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
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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
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challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to the Company.
The commercial success of the Company will also depend upon avoiding
the infringement of patents issued to competitors and upon maintaining the
technology licenses upon which certain of the Company's current products are,
or any future products under development might be, based. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce
the Company's patent and license rights or to determine the scope and validity
of others' proprietary rights. If competitors of the Company prepare and file
patent applications in the United States that claim technology also claimed by
the Company, the Company may have to participate in interference proceedings
declared by the PTO to determine the priority of invention, which could result
in substantial cost to the Company, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant
liabilities to third parties and require the Company to license disputed rights
from third parties or cease using the technology. A U.S. patent application is
maintained under conditions of confidentiality while the application is pending
in the PTO, so that the Company cannot determine the inventions being claimed
in pending patent applications filed by its competitors in the PTO. Further,
U.S. patents do not provide any remedies for infringement that occurred before
the patent is granted.
The University of California and its licensee, Vysis, Inc. ("Vysis"),
filed suit against Oncor on September 5, 1995 for infringement of U.S. Patent
No. 5,447,841 entitled Methods and Compositions for Chromosome Specific
Staining which issued on that same date. The patent relates to a method of
performing in situ hybridization using a blocking nucleic acid that is
complementary to repetitive sequences. On April 9, 1998, the Company, Vysis
and the University of California entered into a definitive agreement to settle
the litigation. As part of the agreement, the Company, Vysis and the Regents
of the University of California stipulated to a final judgment order which was
approved and issued by the U.S. District Court for the Northern District of
California. Under the terms of the definitive agreement, the Company obtained
a world-wide nonexclusive royalty-bearing license to U.S. Patent No. 5,447,841
and any divisionals, continuations, continuations-in-part, reissues,
extensions, reexaminations, substitutions, renewals and foreign counterparts
thereof throughout the world for use in the fields of human oncology for both
clinical and research applications. The Company also obtained a nonexclusive
royalty-bearing license to certain direct labeling technology rights owned by
Vysis in U.S. Patent 5,491,224 and any divisionals, continuations,
continuations-in-art, reissues, extensions, reexaminations, substitutions,
renewals and foreign counterparts thereof throughout the world. In return, the
Company has agreed to convey to Vysis its fluorescence in situ hybridization
(FISH) genetic probe business, retaining full rights to the field of human
oncology for research and clinical applications, including the Company's
recently FDA approved INFORM HER-2/neu breast cancer test. Sales of the
conveyed FISH products represented less than $3.0 million of the Company's 1997
gross revenues. The Company also made initial cash payments to Vysis of $0.5
million, and an additional payment of $1.5 million will be due on April 10,
2000 in order to extend the licenses beyond that date.
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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. The Company has chosen not to contest priority
in the interference.
On April 27, 1998, the Company received a summons and complaint in
connection wit 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 1300 video inspection system to Key Technology, and seeks
damages against the Company of $1,475,000. 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
business, financial condition or results of operations.
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
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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.
Approximately $6.0 million of the Company's current assets are denominated in
currencies other than U.S. dollar. These current assets consist of $2.4
million in cash, $1.0 million in restricted cash, $1.2 million in accounts
receivable, $1.0 million in inventory, and $0.4 million in prepaid expenses.
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
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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
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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
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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
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26
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.
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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. On April 9, 1998, the Company and Vysis entered into
a definitive agreement to settle this litigation. Under the terms of the
definitive agreement, the Company obtained a non-exclusive royalty-bearing
license to U.S. Patent No. 5,447,841 for use in the fields of human oncology
for both clinical and research applications. The Company also obtained a
non-exclusive royalty-bearing license to certain direct labeling technology
rights owned by Vysis. Oncor, in turn, agreed to convey to Vysis its
fluorescence in situ hybridization (FISH) genetic probe business, retaining
full rights to the field of human oncology for research and clinical
applications, including the Company's INFORM(TM) HER-2/neu breast cancer test.
Sales of the conveyed FISH products represented less than $3.0 million of the
Company's 1997 gross revenues. The Company will also make an initial
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cash payment to Vysis of $500,000 and an additional payment of $1.5 million on
April 9, 2000.
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 1300 video inspection system to Key Technology, and seeks
damages against the Company of $1,475,000. 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
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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.
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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
Restructuring 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.
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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
until sometime in 1999. The Company's current cash resources are 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 $3.5 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 exchanged approximately 1.65
million shares or common stock for all the outstanding shares of Codon
Pharmaceuticals, Inc., formerly known as OncorPharm, Inc. ("Codon"). The
effect of this transaction was to increase the Company's ownership of Codon to
100%. This transaction has been accounted for as a purchase. Of the purchase
price of approximately $6.2 million, $5.7 million has been allocated to
research and development projects in process and expenses in the first quarter
of 1998. As a result of this transaction, all of 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.
Effective April 10, 1998, the Company conveyed its non-oncology
genetic probe business unit and cash of $0.5 million to Vysis, Inc. as
consideration for obtaining certain key royalty-bearing licenses and for
settling claims of past patent infringement and related claims made against the
Company. As a result of this transaction, beginning in the second
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quarter of 1998, the Company will report significantly reduced sales, costs of
sales and selling, general, administrative, research and development expenses
of the Company. Revenues for this business unit in 1997 were approximately
$3.0 million. The Company believes that the total costs and expenses
associated with the business unit in 1997 were greater than $3.0 million. As a
result, the Company expects that results of operations starting in the second
quarter of 1998 will reflect the decreased sales and expenses attributable to
that business unit. The Company is currently seeking a purchaser for its
non-strategic research products business unit. If such transaction were to be
completed, the sales, costs and expenses as noted above will be further reduced
by a substantial amount. Collectively, these two units are referred to as the
non-strategic operating units 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 restructuring 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 of its research products
business unit, which currently generates sales and margins which are
significant to the sales of the Company. If 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 certain product mix changes (2.1%) and competitive pressures on
European margins (0.5%), 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
(1.5%, more than offsetting the benefits of the restructuring efforts).
Specifically, the Company discontinued the sale of certain products, mainly
high-end imaging equipment, which had high gross margins but which had low or
negative net margins after recognizing the relating selling, servicing and
collection expenses. The Company cannot
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33
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 Company's restructuring expense 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 restructuring plan. The goodwill charge-off
was related to the computerized imaging products. There were no restructuring
costs in 1997 or 1995. The restructuring program was anticipated to, and did,
have an immediate effect on sales, gross margins, and selling, general and
administrative expenses. The sales declines noted above for 1996 and 1997 were
due in large measure to retirement from the market of more that one hundred
products, most notably the computerized imaging and Appligene products with
respect to the U.S. Gross margins declined as a result of these actions
because the gross margin on the sales of imaging systems historically had been
higher than on the weighted average gross margins of other Oncor products.
These lost margins were more than offset by savings resulting from the
termination of all imaging system employees, expenses for whom were reported
primarily in selling, general, administrative, research and development
departments.
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 (decreased $1.5 million), the change in exchange rates (decreased $0.5
million), and the full year beneficial effects of the restructuring plan
instituted in the second quarter of 1996 in the U.S. (decreased $0.1 million).
These decreases were partially offset by legal and other expenses associated
with certain proposed strategic transactions (increased $1.4 million) and with
a lawsuit brought by a former employee (increased $0.4 million). The increase
in 1996 was due to administrative expenses associated with the public reporting
status of Appligene (increased $0.5 million) and the above mentioned expenses
associated with certain intellectual property matters (increased $1.6 million)
more than offsetting the beneficial effects of cost reduction programs
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34
(decreased $0.1 million) and deconsolidation of the operating results of Codon
in 1996 (decreased $0.7 million). 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 restructuring 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 restructuring 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.
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35
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.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
The consolidated cash and liquid investments balances of the Company
were $4.1 million and $4.6 million at April 30, 1998 and March 31, 1998,
respectively, compared to $5.0 million at December 31, 1997. Approximately
$2.1 million and $2.8 million of the cash and liquid investments at April 30,
1998 and March 31, 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.
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.
In April 1998, the Company increased its secured line of credit from
$3.0 million to $3.5 million, which the Company has fully drawn down. The
Company is negotiating an increase in the line of credit to $4.0 million,
although there can be no assurance that the Company will be able to negotiate
such an increase on commercially acceptable terms, if at all.
Analysis of Historical Cash Losses
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
======
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. Such disputes are scheduled to be
adjudicated in the second quarter of 1998.
34
37
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 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. 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.
As of April 30, 1998, the Company had an available consolidated cash
balance of approximately $3.2 million, of which approximately $2.0 million is
available for use in North America after the recent payment for the acquisition
of a strategic license. The divestiture of certain non-strategic assets and
other cost-cutting actions, which are expected to be completed by June 30,
1998, will reduce the Company's ongoing cash requirements significantly. The
Company expects that its current liquid resources will not be sufficient to
fund operations after the end of May 1998.
In April 1998, the Company increased its secured line of credit from
$3.0 million to $3.5 million, which the Company has fully drawn down. The
Company received in May 1998 a definitive term sheet to increase a secured line
of credit from $3.5 million to $4.0 million, although there can be no assurance
that the Company will be able to negotiate such an increase on commercially
acceptable terms, if at all. The Company is considering additional alternative
forms of financing, including among other things, (1) equity or debt financing,
(2) sale of significant assets, including its nonstrategic research products
business unit, 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, (3) sale of publicly-traded
Oncormed common stock, (4) third party funding of Codon for future cash
requirements and recovery of Oncor advances to Codon and (5) other
35
38
alternatives. After the 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
must first be utilized to repay, in whole or in part, the Company's bank debt
of $3.5 million in accordance with the terms of the underlying line of credit
and related guarantees.
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 first quarter of 1998 in the range of $4.75 to $7.50 per share. The
Company is restricted from selling 1.0 million such shares in the public
markets due to outstanding options it has issued or anticipates issuing
pursuant to which the Company has offered to sell the shares to the option
holders for $2.00 per share. While exercise of such options would generate
cash of approximately $2.0 million, such exercise is outside the control of the
Company. The remaining 1.0 million shares of common stock of Oncormed can be
sold in the public markets only pursuant to restrictions 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 and currently is holding
discussions with potential purchasers pursuant to this effort.
The Company believes that it will be able to continue to fund its
operations through the end of 1998 through a combination of (i) generating
sufficient cash from operations or financings and (ii) reducing its on-going
expenses. This belief is based on: (1) its success in raising four rounds of
equity financing in the past two years; (2) the recent credit support provided
to the Company by certain of its key shareholders; (3) substantial and ongoing
interest expressed by members of industry in purchasing non-core assets of the
Company; (4) the recent FDA approval of the Company's flagship diagnostic test;
(5) high scores by governmental agencies on evaluations of requests by the
Company for significant research grants in 1998; (6) the recent settlement of
extremely costly and disruptive litigation; and (7) the recent actions taken to
cut discretionary expenses approximately 50% without jeopardizing the ongoing
sales of key products.
In April 1998, two of the alternative forms of financing, which the
Company had previously reported as being in more advanced stages for
discussions, subsequently were not converted from the term sheet stage to that
of definitive agreements. The Company continues actively to pursue similar
transactions with other parties.
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
36
39
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 May 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.
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.
NEW ACCOUNTING PRONOUNCEMENTS
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
37
40
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.
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
financial statements. Management expects that foreign currency translation
adjustments will be 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 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 disclosure will have a material
impact on the Company.
38
41
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.
39
42
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, and to the Vysis and Key
Technology matters described in Note 8,
as to which the date is April 30, 1998)
F-1
43
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.
F-2
44
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
Restructuring 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.
F-3
45
ONCOR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1995, 1996, and 1997
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 -
===========================================================
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
================================================
Treasury Stock
Accumulated ------------------
Deficit 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)
------------------------------------------------
BALANCE,
DECEMBER 31, 1997 ($132,584,069) 79,409 ($220,512) $3,188,110
================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
46
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.
F - 5
47
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 $3.5 million.
The consolidated cash and liquid investments balances of the Company
were $4.6 million at March 31, 1998, compared to $5.0 million at December 31,
1997. Approximately $2.8 million of the cash and liquid investments at
March 31, 1998 are limited to fund operations of the Company's European
F-6
48
subsidiary. Liquid investments include restricted cash, cash equivalents and
short-term investments as set forth on the consolidated balance sheet.
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. Such disputes are scheduled to be
adjudicated in the second quarter of 1998.
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.
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 planned divestiture of certain non-strategic assets and other
cost-cutting actions, which are expected to be completed by June 30, 1998, are
expected to reduce the Company's ongoing cash requirements significantly. In
April 1998, the Company's line of credit was increased by $500,000 to $3.5
million which the Company has fully drawn down. The Company is negotiating an
increase in the line of credit to $4.0 million.
The Company is considering additional alternative forms of financing,
including among other things, (1) equity or debt financing, (2) sale of
significant assets, including its nonstrategic research products business unit,
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, (3) sale of publicly-traded Oncormed common
stock, (4) third party funding of Codon for future cash requirements and
recovery of Oncor advances to Codon and (5) other alternatives. After the
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 must first be utilized to repay, in
whole or in part, the Company's bank debt of $3.5 million in accordance with
the terms of the underlying line of credit and related guarantees.
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 first quarter of 1998 in the range of $4.75 to $7.50 per share. The
Company is restricted from selling 1.0 million such shares in the public
markets due to outstanding options it has issued or anticipates issuing
pursuant to which the Company has offered to sell the shares to the option
F-7
49
holders for $2.00 per share. While exercise of such options would generate
cash of approximately $2.0 million, such exercise is outside the control of the
Company. The remaining 1.0 million shares of common stock of Oncormed can be
sold in the public markets only pursuant to restrictions 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 and currently is holding
discussions with potential purchasers pursuant to this effort.
In April 1998, two of the alternative forms of financing, which the
Company had previously reported as being in more advanced stages for
discussions, subsequently were not converted from the term sheet stage to that
of definitive agreements. The Company continues actively to pursue similar
transactions with other parties.
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.
In the event that the Company is unable to raise additional capital by
the end of May 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.
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.
F-8
50
Due to the Company's operations in currencies other than the U.S.
dollar, the Company is subject to foreign currency risk. At December 31, 1997,
approximately $4.6 million of the Company's current assets were denominated in
currencies other than U.S. dollar. These current assets consisted of $2.4
million in cash, $1.0 million in restricted cash and $1.2 million in accounts
receivable.
(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.
F-9
51
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. Grant revenues are reported when earned and
are not refundable in accordance with the provisions of the grant awards.
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
F-10
52
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 43.7 million French francs and research and
development tax credits of approximately 1.1 million French francs 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.
F-11
53
Net operating losses and research and development tax credits expire
as follows.
United States France
- --------------------------------------------------------------------------------------------------------------
Research and Research and
Year of Development Year of Development
Expiration NOL Tax Credits Expiration NOL Tax Credits
-------------- --------------- ---------------- ------------ --------- -------------------
(in United States dollars) (in French francs)
1998 $167,000 5,000 1998 -- 88,000
1999 315,000 23,000 1999 -- --
2000 372,000 27,000 2000 736,000 550,000
2001 848,000 41,000 2001 14,275,000 442,000
2002 1,747,000 78,000 2002 16,814,000 --
2003 1,807,000 100,000 Indefinitely 11,881,000 --
2004 1,705,000 0
2005 2,538,000 51,000
2006 4,991,000 99,000
2007 11,137,000 175,000
2008 10,707,000 301,000
2009 14,789,000 307,000
2010 11,782,000 103,000
2011 19,856,000 154,000
2012 17,939,000 136,000
---------- -------
Total $100,700,000 1,600,000 Total 43,706,000 1,080,000
============ ========= ========== =========
The Company's net loss related to foreign and domestic operations was $4.0
million and $26.9 million, respectively in 1997; $2.8 million and $26.2 million
respectively in 1996; and $0.9 million and $17.3 million in 1995, respectively.
Research and Development Costs
Expenditures for research and development activities are charged to
expense as incurred.
F-12
54
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.
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 financial
statements. Management expects that foreign currency translation adjustments
will be 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 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 disclosure will have a material
impact on the Company.
(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.
F-13
55
(4) RESTRUCTURING EXPENSE
In 1996, the Company adopted a restructuring plan to discontinue the
development, manufacture, sale and support of certain imaging, research, and
non-oncology genetics products. Recorded restructuring 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. The
discontinued product lines were customized, computerized, microscopic imaging
systems, certain gene-based DNA probes chemistries and certain other chemical
test kits and components. The related charge was incurred in conjunction with
the Company's decision to cease field sales and support for these lines.
(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%,
F-14
56
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 of
approximately $4.0 million. 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 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 first quarter of 1998 in the range of $4.75 to $7.50 per share. The
Company is restricted from selling 1.0 million such shares in the public
markets due to outstanding options it has issued or anticipates issuing
pursuant to which the Company has offered to sell the shares to the option
holders for $2.00 per share (see Note 11). While exercise of such options
would generate cash of approximately $2.0 million, such exercise is outside the
control of the Company. The remaining 1.0 million shares of common stock of
Oncormed can be sold in the public markets only pursuant to restrictions 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.
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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 effect of these transactions was to change the Company's proportionate
share of Codon's equity which was recorded as a $3.0 million increase to
paid-in capital. 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.
Effective February 28, 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%. This transaction has been accounted for
as a purchase. Of the purchase price of approximately $6.2 million, $5.7
million has been allocated to research and development projects in process and
expensed in the first quarter of 1998. As a result of this transaction, all of
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. The Company henceforth will include in its consolidated cash
position any amounts raised through the separate financing activities of Codon.
F-16
58
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
------------------------- -------------------------
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% and
the Company's proportionate share of Appligene's equity was increased by $5.4
million, which was recorded as an increase to the Company's paid-in capital.
(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.
F-17
59
(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. The market value of the common stock on
the date of issuance of the preferred stock was $4.75.
The Company will record as a deduction in determining net income or
loss attributable to common shareholder the difference between the conversion
price and the quoted price of the stock issuable upon conversion of the
preferred stock (the "beneficial conversion feature"). The beneficial
conversion is treated as a dividend and recorded on a straight line basis, over
the minimum holding period of the issuance of the preferred stock pursuant to
which the maximum beneficial conversion feature is earned.
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.
These notes were convertible at prices which declined from 100% to
F-18
60
80% of the market value of the common stock at the time of conversion over a
period of approximately 5 months.
In December 1995, the Company completed a private placement of 768,384
shares of its Common Stock and issued convertible 4.5% unsecured notes payable
of $7.0 million. Total proceeds, net of issuance costs were approximately $9.3
million. As of December 31, 1996, all these notes had been converted. These
notes were convertible at prices which declined from 100% to 80.5% of the
market value of the common stock at the time of conversion over a period of
approximately 5 months.
On all convertible debt instruments with beneficial conversion
features, 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 recorded over the minimum holding periods of the debentures pursuant to which
the maximum beneficial conversion feature is 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
F-19
61
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.
F-20
62
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
F-21
63
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
----------
$1,499,000
----------
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
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64
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 entered into agreements with certain senior
executives of the Company which provide for severance payments, totalling
approximately $900,000 in the event of a change in control or involuntary
termination. In addition, certain senior executives will receive payments of
at least $250,000 in the aggregate, depending on the aggregate amount of
consideration underlying a sale of the Company.
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 installments 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 consideration of the officer's
continued employment pursuant to the terms of a Management Continuity
Agreement, dated September 29, 1997, between Oncor, Inc. and such officer,
reduced the outstanding installments by $75,000.
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. As part of the agreement, the Company, Vysis and the Regents
of the University
F-23
65
of California stipulated to a final judgment order which was approved and
issued by the U.S. District Court for the Northern District of California.
Under the terms of the definitive agreement, the Company obtained a world-wide
nonexclusive royalty-bearing license to any divisionals, continuations,
continuations-in-part, reissues, extensions, reexaminations, substitutions,
renewals and foreign counterparts thereof throughout the world for use in the
fields of human oncology for both clinical and research applications. The
Company also obtained a nonexclusive royalty-bearing license to certain direct
labeling technology rights owned by Vysis and any divisionals, continuations,
continuations-in-art, reissues, extensions, reexaminations, substitutions,
renewals and foreign counterparts thereof throughout the world. In return, the
Company has agreed to convey to Vysis its fluorescence in situ hybridization
(FISH) genetic probe business, retaining full rights to the field of human
oncology for research and clinical applications, including the Company's
recently FDA approved INFORM HER-2/neu breast cancer test. The Company also
made initial cash payments to Vysis of $0.5 million, and an additional payment
of $1.5 million will be due on April 10, 2000 in order to extend the licenses
beyond that date. In connection with the release by certain shareholders of
their security interest in the assets of the genetic probe business which was
conveyed to Vysis and the security interests in the assets of the research
business which is currently held for sale, the Company has committed to issue
warrants to purchase 2,000,000 shares of Oncor, Inc. common stock at $0.50 per
share. In addition, the Company has committed to reprice approximately 480,000
existing warrants held by the same shareholders.
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 1300 video inspection system to Key Technology, and seeks
damages against the Company of $1,475,000. 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
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.
F-24
66
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.
The operating losses attributable to the Company's operations in
France for the years ended December 31, 1995, 1996, and 1997 were approximately
$0.7 million, $2.8 million, and $3.6 million, respectively. Export sales were
approximately $9.0 million, $8,7 million and $7.9 million for 1995, 1996 and
1997, respectively.
Revenues of significant European Countries:
1995 1996 1997
-------------- -------------- --------------
France 3,681,633 2,845,889 2,584,043
Germany 1,718,367 1,610,696 1,183,019
United Kingdom 891,837 854,381 1,016,389
(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
F-25
67
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
interest rate effective for the line of credit as of December 31, 1997 was
7.58%. 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.
F-26
68
(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. The interest rates range from 8.39% to 9.32%. 1,178,788 893,40
--------------- ----------------
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
==========
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69
(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 . . . . . . . . . . . . . . . . . . $1,195,485 $980,379
Work in progress . . . . . . . . . . . . . . . . . 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
======================= ==================
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70
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the
following:
AS OF DECEMBER 31,
--------------------------------------
1996 1997
---- ----
Employee benefit . . . . . . . . . . . . . . . . . . . . . . $ 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.
F-29
71
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.
40
72
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.)
41
73
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.)
42
74
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.)
43
75
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.)
10.17 Management Continuity Agreement, dated September 29, 1997, between Oncor, Inc. and Stephen Turner.
10.18 Management Continuity Agreement, dated September 29, 1997, between Oncor, Inc. and Cecil Kost.
10.19 Management Continuity Agreement, dated September 29, 1997, between Oncor, Inc. and John L. Coker.
23 Consent of Independent Public Accountants to incorporation of reports in Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 into the Company's previously filed S-3
Registration Statements File Nos. 333-00085, 333-00735, 333-11997, 333-20425 and 333-46855, and
into S-8 Registration Statements File Nos. 33-83830, 33-81021 and 333-00063.
27.1 Financial Data Schedule.
44
76
(b) Reports on Form 8-K.
None.
45
77
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: May 21, 1998 By /s/ Cecil Kost
---------------------------------
Cecil Kost
President and Chief Operating 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 Title
- ---- -----
May 21, 1998 /s/ Jose J. Coronas Chairman of the Board
--------------------------
Jose J. Coronas
May 21, 1998 /s/ Cecil Kost President, Chief Operating Officer and
--------------------------
Cecil Kost Director (principal executive officer)
May 21, 1998 /s/ John L. Coker Vice President, Secretary and
--------------------------
John L. Coker Treasurer (principal financial officer
and principal accounting officer)
May 21, 1998 /s/ Derace L. Schaffer Director
--------------------------
Derace L. Schaffer
May 21, 1998 /s/ William H. Taylor II Director
--------------------------
William H. Taylor II
May 21, 1998 /s/ Timothy J. Triche Director
--------------------------
Timothy J. Triche
May 21, 1998 /s/ Stephen Turner Director
--------------------------
Stephen Turner
78
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, and to the Vysis and Key Technology matters described in Note 8, as to
which the date is April 30, 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
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79
ONCOR, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to
beginning of expenses Balance at end
period (recoveries) Write-offs of period
---------------- -------------- ------------ --------------
December 31, 1995
- -----------------------
Allowance for 173,351 200,295 (32, 764) 340,882
doubtful accounts
December 31, 1996
- -----------------------
Allowance for 340,882 73,408 (42,306) 371,984
doubtful accounts
December 31, 1997
- -----------------------
Allowance for 371,984 46,647 -- 418,631
doubtful accounts
December 31, 1995
- -----------------------
Reserve for excess and 807,601 2,180,331 (1,457,722) 1,530,210
obsolete inventory
December 31, 1996
- -----------------------
Reserve for excess and 1,530,210 1,450,192 (327,281) 2,653,121
obsolete inventory
December 31, 1997
- -----------------------
Reserve for excess and 2,653,121 738,256 (495,443) 2,895,934
obsolete inventory
December 31, 1995
- -----------------------
Deferred tax valuation 20,800,000 7,500,000 -- 28,300,000
reserve
December 31, 1996
- -----------------------
Deferred tax valuation 28,300,000 7,500,000 -- 35,800,000
reserve
December 31, 1997
- -----------------------
Deferred tax valuation 35,800,000 8,100,000 -- 43,900,000
reserve
S-2